Anti-Contractor ABC Test Also Results In Fewer W-2 Jobs Says Study

For years at this point, it’s been clear that the ABC test, promoted heavily by the left as a way to end miscategorization of employees as independent contractors (ICs), has been a foray into faith. Backers have presumed that a radical and arbitrary shift in long-established systems will deliver the desired results. A new multi-state economic analysis shows something far different.

The U.S. Department of Labor and state labor agencies, for decades, have regularly announced enforcement of existing laws that prohibit the practice. Courts have long applied existing standards. While there have been legitimate complaints, there have been ways to address them, assuming political and agency will.

Supporters of the ABC test, a relic of the world of 1930s work, resurrected it over the last few years as a supposedly easy way to set things straight. The concept adopts a three-prong test that essentially assumes almost anyone doing work on behalf of a company that is part of its ordinary course of business should be an employee and never a contractor.

This isn’t about rideshare drivers. Take all the platform gig workers and you have less than 10% of the independent contractors in the country. Independent contractors — also known as consultants or freelance workers — provide services to companies. They may be self-employed or wage or salary workers. Those who do independent contracting as their only or main work comprise 11.9 million, or 7.4% of total employment, according to government data. Another 1.9 million, or 22.8% of people with multiple jobs, are independent contractors as their second jobs. There are arguments that the numbers grossly underestimate the full scope, which would include tens of millions more who do casual work on the side.

California’s AB-5 law imposed the ABC test throughout the state. It was such a disaster for self-employed people that the legislature eventually had to exempt more than 100 industries and occupations.

Much of this has taken the nature of anecdotal data that has value but not the weight of quantitative measure. A study out of the free-market-oriented Mercatus Center at George Mason University by labor economist Liya Palagashvili and Revana Sharfuddin, a pre-doctoral research, has the first take on the broader implications, and it’s a doozy.

The full study isn’t out, so a complete look isn’t yet available, but an advanced look is. The researchers used what is called a “Callaway and Sant’Anna Difference-in-Differences (DiD) approach and an event-study framework tailored to settings with staggered policy adoption.”

First, a bit of explanation. Difference-in-difference studies are popular structures that take two similar groups at two different periods. The early period shows them at an equivalent stage at a given time. In the second period, one of the groups has undergone a “treatment” (showing terminology coming from the healthcare field, but which is valid in other types of analysis). Then researchers compare the differences between the two different groups. Callaway and Sant’Anna refers to an expansion of the technique by Brantly Callaway and Pedro H.C. Sant’Anna to allow analysis of non-parallel cases. Palagashvili and Sharfuddin took this approach to look at what different states did at uncoordinated times. Some of the states had implemented an ABC test, others didn’t.

“Our results show that when a state adopts an ABC test, it causes a reduction in traditional (W-2) employment, self-employment, and overall employment in both the short-run and the long-run (15 years),” they wrote.

If correct — again, this is early-release data and not the full study which is upcoming — this is astounding and goes far beyond the concerns that businesses and independent contractors have discussed.

Here are the key results:

· The implementation of an ABC test cut W-2 employment — those are regular type jobs that test supporters say would increase with passage — by 4.73%.

· There was a decline of 6.43% in self-employment, which clearly isn’t replaced by regular employment jobs, although that has been a major claim.

· There was an overall employment decline of 4.79%.

The reductions are relative to control states that lack an ABC test, so a competitive failing in terms of state economies. Occupations with the highest shares of independent contractors saw the largest declines in employment. From 5 to 15 years after implementation, the states see “significant and sustained decline.”

What the study didn’t mention was the likely impact to state economies, as consumer spending is the driving force (69% of GDP on a national basis) and so lost employment means less ability to spend.

The nature of the data didn’t allow Palagashvili and Sharfuddin to pinpoint the reason for the drops, but they noted some potential explanations. Businesses that heavily used ICs in addition to W-2 employees might have been forced out of business or to cut back, resulting in headcount cuts. “This is supported by anecdotal evidence coming out of California where employers started closing down their offices that had both W-2 employees and contractors,” they wrote.

Those businesses might also have moved to other states without an ABC test, which might be the cause of W-2 employment growth in the states without the test.

And even excluding the financial crisis and pandemic, their findings were consistent.

Perhaps it’s time for the incoming administration to walk back the ABC-like labor moves of the Biden White House for the sake of employment everywhere.