When California’s AB5 law created new strict standards for independent contractors, the evidence that it would be harmful was only anecdotal.  Most acknowledged AB5 would cause widespread disruption, and many news stories were reported of people who had worked as independent contractors for years suddenly being out of their jobs as the businesses that had hired them scrambled for compliance.  Eventually, as evidence of AB5’s ill-effects mounted, even the State’s legislature begrudgingly enacted a number of limited exemptions in AB2257.  However, even given these belated acknowledgments, AB5’s most ardent supporters thought the effects of AB5 outweighed any bad – their argument was that the loss of independent contractors would eventually lead to a gain in employment.  We now know that was wrong.  Empirical data from a recent study[1] demonstrates AB5 has reduced independent contractor hiring without a substantial increase in traditional employment.

Analyzing employment data from January 2011 to September 2023, and comparing California to other states with the older common-law test, the study found that overall AB5 had reduced self-employment by 10 percent, while having a statistically insignificant effect on traditional employment, thus resulting in lower overall employment and labor force participation.  Examining occupations by prevalence of self-employment, AB5 had little effect in the lowest quartile of prevalence, while it reduced employment of all types in the second and third quartiles; while traditional employment increased in the highest quartile of self-employment prevalence, this was more than counteracted by a decrease in self-employment.

Legislators and regulators should stop forcing square pegs into round holes.  Making the test for independent contractors too restrictive hurts the economy without a net benefit to people receiving traditional employment benefits.  If these policymakers wanted to make a real difference in the lives of independent contractors and not just appease their union political constituency, they should be looking to encourage portable benefits that accrue to workers of all types.  Adhering to paradigms of eligibility for these programs by relying on a century old framework of employment is more harmful in the long run.

[1] Mercatus Center. “Assessing the Impact of Worker Reclassification: Employment Outcomes Post–California AB5.” 2024, https://www.mercatus.org/research/working-papers/assessing-impact-worker-reclassification-employment-outcomes-post. PDF download.

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