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From an economics standpoint, some experts have said AB 5 restricts the labor market and favor a repeal of the controversial legislation. Courtesy photo
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More than 100 economists statewide call for AB 5 suspension

REGION — More now than ever, a flexible workforce is needed.

It’s why more than 100 economists and public policy experts across the state are calling on Gov. Gavin Newsom to suspend the controversial law, Assembly Bill 5, due to the COVID-19 pandemic. The initiative was spearheaded by the Independent Institute, a non-partisan public policy group in Oakland, who reached out to economists across the state.

The law, which expanded the Dynamex decision, forces businesses to implement the ABC test to determine whether or not an independent contractor has been misclassified.

Ten economists from the University of California, San Diego and San Diego State University signed the open letter, several of whom said the law is to rigid and should be repealed.

Marjorie Falvin, a professor emeritus of economics at UCSD, said most economists have been against AB 5 prior to the pandemic, calling it a “disaster” and “insane.” And while little official data exists yet for economists to analyze, she said the app-based platforms and independent contractors have been critical during the crisis.

“To pass that kind of law, you’ve really not thought about the consequences like an economist or a reasonably intelligent person would think about it,” Falvin said. “In that way, the crisis, I think, really shows in sharper relief what a disaster it is; and therefore I hope there is a temporary suspension and hope there is a ballot measure and people rethink it.”

From an economics standpoint, she, along with several of her colleagues said AB 5 restricts the labor market and most are in favor of a repeal, even before the pandemic.

Additionally, other economists such as Marc-Andres Muendler of UCSD, Lee Ohanian of UCLA and Robert Brown of the California State University San Marcos, said a restrictive law such as AB 5 will lead to lower wages.

Alexis Todo, an associate professor of economics at UCSD, said AB 5 is too rigid, especially during a pandemic where flexibility, the evolution of the economy and the relationships between businesses and contractors is important more than ever.

In addition, he said AB 5 will shift costs to businesses leading to fewer workers being hired and will contract with workers out of state.

He said the intention of the law is good, but in the long-term, the strictness of the law may likely come back to haunt it.

Additionally, he and Falvin and others said the language of the bill is much too broad, thus limit positive economic outcomes.

Several said they worry it will increase unemployment, while all said the bill redirects the cost of business from the independent contractor to the employer, thus lowering wages to meet those mandated costs.

“This is a bill from the 20th century and is an old-fashioned way of thinking,” Todo said. “It’s no longer appropriate for the 21st century.

Intentions

Falvin and others said the intention of the law, preventing misclassification, is a good thing. Granting benefits to gig workers in a traditional workplace is a noble cause, she said, but “good intentions” are not enough. Falvin, along with Brown, said by proposing new laws and regulations to make contractors a W2 employee with eliminate jobs, not save or create them.

“That’s what these legislators … seem to really not understand,” Falvin said. “There are serious issues with that, that you can destroy or hugely reduce the size of the sector. Their other mistake was they made it way too broad.”

Pandemic

Falvin said we had a good economy with full employment even before the pandemic, but AB 5 screwed that up quite a bit when it was enacted on Jan. 1. As W2 workers have been furloughed or laid off, yet another part of the economy needed to expand such as drivers for gig platforms such as Amazon Fresh, Instacart and Uber, she said. Existence may it possible for relocation of labor for industries that were shut down.

“At one level, it shows how valuable that less formal sector is,” Falvin said. “Something like Amazon Fresh is not going to be able to hire 10,000 employees if you have the restrictions of a formal employer. Now that we’re in a crisis, the delivery of food of medicine is working pretty well. To screw that up at this point, would be mind-boggling stupid.”

Todo said the current challenges are calling for a more flexible workforce can help reduce the rapid unemployment rate. However, firms such as Uber, Lyft, Instacart and others, have ignored AB 5 to date and have a ballot measure on the November election.

Flexibility

Ohanian said there is “absolutely” no economic reason — based on cost-benefit analysis — to support the law, noting it is an “enormous infringement on the economic right of an individual to earn a living.” The current impact, he said, is that it is creating massive inflexibility in exactly the areas where people wish to work — delivery drivers and health care professionals — but they are prohibited by law to work as an independent contractor.

Those who signed the bill never asked: “Why should we prohibit these working arrangements?” Now it is becoming incredibly costly, he added.

“Some, particularly women, place an extremely high value on their ability to schedule when they work, Ohanian said. “Being an independent contractor allows this, but working as a W2 employee may not. There are thousands of California workers who are upset with this law because it deprives them of the right to work as they wish.

“The Bureau of Labor Statistics surveys of independent contractors show that about 80% of independent contractors prefer to work this way than be a W-2 employee.”

Brown, who was unaware of the letter and did not sign it, said he aligns with his colleagues. He understands the spirit regarding abuses of some contracting professions, but the effects shift costs from the contractor to the employer. Those costs, he said, will result in lower wages for workers and higher prices for consumers.

“Those folks who are now going to be defined as employees may very well face lower wages because of the costs now incurred by the employer,” Brown said. “If it’s a competitive labor market, that doesn’t logically follow.”

He said he doesn’t understand how wages can increase with costs shifted to the employer.

For example, he said if a contractor is earning $20 and is put on as an employee, the employers benefit responsibilities and taxes will reduce wages or pass it on to the consumer.

“When you’re an independent contractor, you probably have more incentive to keep those costs down,” Brown said of administrative expenses. “Whoever is contracting with you has really limited or no control over supervising you other than you’re going to do this job for me.”

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More than 100 economists statewide call for AB 5 suspension | Let CA Work May 6, 2020 at 3:48 am

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