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October 8, 2015

The Freelance Economy: Supportive Policy

Working at the convergence of precarious employment and the digital revolution

Over the last few weeks, we at The DEEP Centre blog have been examining the rise of freelance employment and its impact on young workers. Whether you call them temps, contractors, or freelancers – these workers exist outside of the traditional 9 to 5, salaried positions with benefits and retirement savings plans. Often, these workers are considered self-employed and must work hard to ensure that they have enough clients and projects in the pipeline to make ends meet. On the positive side, these workers enjoy increased flexibility in their schedules, are able to set their own rate of pay, and have greater agency on what, and with whom, they work. On the negative side, these workers may find themselves without any income on short notice, may work for smaller pay in order acquire contracts, and must take care of their own health care costs and saving plans. For many, this is a precarious place to exist, creating uncertainty, debt, and an inability to make large purchases such as cars and houses. This has implications for the larger national economy and creates the potential for an increased reliance on government social programs by precarious workers who can’t make the freelance economy work efficiently for them and their families.

These implications are areas for policy makers to consider, and consider carefully. While some have called for the forced reversal of this trend, the ongoing economic recovery and overall change in the skills required for an increasingly service based marketplace make it unlikely that any policy initiative could put the genie back in the bottle. According to the Bureau of Labor Statistics in the US, the number of self-employed workers there increased by 1 million people between 2014 and 2015 to 15.5 million total individuals. The Freelancers Union estimates that the number of contingent workers (including self-employed, temporary, moonlighters, and others) is upwards of 53 million people in the US. This share of the workforce is expected to increase to 60 million people by 2020. Yet, despite these large and often repeated statistics, the true scope and nature of the freelance economy has been subjected to very little research and there is scant quantitative data available for policy makers to work with.

In the meantime, the digital revolution has met this apparent trend with innovative tools, services, platforms, and apps that empower individuals working in precarious employment to manage their clients, projects, and finances. Last week, we took a special look at one such service, JobBliss, and their matchmaking service between freelancers and companies. These types of new companies are bridging the gap between those that may be naturally inclined to the ‘high octane’ entrepreneurship required to survive in the freelance economy and those that are highly skilled, but a little less up on their networking abilities. These companies, however, are unable to provide some of the primary benefits of working in a traditional position: retirement savings, health care benefits, unemployment insurance, and an expectation for minimum wage and/or income. These issues need policy solutions.

Traditionally, payment to pension plans has been charged by governments to employers. In Canada, firms and employees are each required to pay half of the income based annual pension contribution. In the freelance economy, firms that hire independent contractors for specific projects aren’t required to pay their portion of the pension payment – the contractor must pay the full amount themselves at the end of the year. As The Economist points out, this essentially means that the freelancer pays a higher rate of tax compared to their salaried peers. For young freelancers, this is especially difficult. Typically, their pursuit of the requisite level of higher education for traditional jobs (which, arguably no longer exist) led to the accrual of student debt. As such, they need as much of their income as possible to manage these debt levels.

In terms of healthcare, some, such as economist Jonathan Gruber, have argued that the more a firm pays for in health insurance premiums for their employees, the less they pay in wages. However, the cost to an employee in uninsured healthcare service or in a private health care plan is typically more than they lose when paying into a group insurance policy through their employer. Those that work in the freelance economy, especially single young workers, may choose to go without health care insurance in order to use that extra income to pay off the aforementioned debts. In Canada this is less of an issue than in the US due to the basic level of public health care provided by the government. Still, prescriptions and dental care are significant health care needs that freelancers may not be able to afford out of pocket, leading to long term-health consequences.

Employment insurance can be quite difficult to access for freelancers. In Canada, a freelancer must voluntarily begin paying Employment Insurance premiums in order to access future benefits from the government. This freelancer must then wait 12 months from the time they begin paying premiums to make a claim. Furthermore, a freelancer is only able to insure their earnings to a maximum of $49,000 CAD per year and could only receive a maximum benefit payment of $524 per week if they were to find themselves without income. If a freelancer becomes pregnant, she is able to register for maternity employment insurance benefits in Canada, but all of the above still applies and payments would only be available for 15 weeks. This is far less than the typical year of maternity leave offered by most employers in Canada. Accessing employment insurance benefits also depends on how the individual came to find themselves without income. Typically, the worker has to have been fired or laid off in order to receive benefits. A contingent worker, who decided not to take (or to end) a contract might be ineligible for employment insurance. This means that some freelancers may find themselves with little to no income at any given point, increasing their risk of poverty and economic scarring.

Lastly, having a minimum wage or expected salary gives workers the ability to plan savings and purchases for the future. Freelancers, however, may find themselves working a varying rate-per-hour, sometimes bidding for projects at the lowest possible price in order to guarantee some sort of income. The amount a freelancer makes from month-to-month or even week-to-week can vary drastically, limiting these workers abilities to save for retirement or buy a house.

The free market can do little to resolve these issues. While policy discussions are nascent and the true nature of the freelance economy largely unknown, there are some solutions in discussion.

In response to a lack of pooled retirement savings and health care plans, venture capitalist Simon Rothman has suggested that there should be a new type of worker classification, which he calls “uncollared workers”, who are neither employees nor self-employed workers. This would allow platforms and app companies, as well as governments, the space to create innovative mechanisms for the freelancers using their services to save for retirement and gain access to health care.

The issues of unemployment insurance and non-guaranteed annual incomes could potentially be remedied through the provision of a universal basic income (UBI). An extremely politically controversial topic, a UBI for all citizens of a certain country would go a long way to freeing up both freelancers and employers to become nimble and flexible – valuable abilities in today’s economy. The concept is simple: everyone given a regular and predictable amount of money from the government without question and without strings. Research has shown that a UBI does not have a significant disincentive on productivity – people generally want to work. Yes, in order to fund this type of public service, government would have to raise taxes. However, Shane Ferro of Business Insider references economist John Quiggin and his argument that a loss in 10% of national income from the middle class has happened over the last few decades anyways – except that this share of national income has only gone to the top 1%. He states, “if that money were clawed back by the state, it could fund a UBI at no additional cost to the 99 per cent.”

As Sara Horowitz rightly points out in her article for Fast Company, people are debating the perils and benefits of traditional jobs over freelance jobs “as if there’s a choice.” There isn’t. The old model of traditional 9-5, salaried, and life-time employment is largely gone. In its place are wide networks of large and small firms fueled by project based talent who may never actually step foot in their workplaces. Rothman agrees, stating that the current debates over Uber’s entry into the taxi industry are predictable, but ultimately are just a delay to the inevitable. Governments have a responsibility to support innovation, while also ensuring labour laws and consumer protections remain strong. In February 2015, the Ontario Government announced that they would be conducting a review of their Employment Standards Act to ensure its adequacy for the new working reality. In the announcement, the government noted an increased need to protect precarious workers. While little is known about the review, the final report is due for publication in early 2016.

Potential policy changes in Ontario and further discussion on creating a new class of worker and implementing a universal basic income will be the subject of next week’s article.

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