Labor Market Neutrality

Three items in the recent news reveal a great deal about what is wrong with the labor market:

If none of this sounds strange to you it’s only because you have been living for so long with labor market regulation that you have probably never bothered to ask what the world would look like without it. So let’s stop and imagine. In a free labor market:

  • There would be no important distinction between full-time and part-time work; instead there would be enormous variety in the number of hours employees work, depending on family circumstances, travel difficulties, individual preference and employer needs.
  • Wal-Mart would have no reason to deny health insurance to some workers and not others; employees would be completely free to substitute wages for health insurance premiums and it wouldn’t matter whether the employer provided the insurance or whether it was purchased on the open market.
  • There would be no important difference between an employee and an independent contractor; either would be completely free to do anything the other is able to do.

She Works Hard for the Money

In short, in a free labor market “employment” would be an unimportant concept. A “labor” transaction would be no different than any other transaction. Paying someone to do your laundry, clean you house, mow your lawn, babysit your children, repair your roof, wash your car, etc., would be no different than purchasing a ticket to see a movie. In each case, you are giving up cash in return for a service you value more than the cash.

Of course, in the world in which we live, whether a transaction constitutes “employment” is hugely important. It affects the taxes you pay, the regulations you must obey and whether the Senate will confirm you to the position of Cabinet Secretary.

And at a time of 9% unemployment (and double that if you count discouraged workers) it’s worth remembering that all these regulations and all these taxes discourage labor market transactions. The uncertainty created by ObamaCare makes things even worse.

In the field of health policy, I find that most people are so wrapped up in the completely artificial notion of “employment” that they can’t see the forest for the trees. Loyal readers will remember our discussion of onsite clinics, set up by employers for their employees. My question: If these clinics really are as good value for money as their promoters claim, why restrict them to employees? Why not sell the services to the community at large. We might ask the same question about the employer’s entire health plan. If the employer has a comparative advantage in providing health insurance (can do better than commercial insurers), why restrict the insurance to employees? Why can’t the employer sell the same plan to nonemployees?

If we can’t have a free labor market, I want to propose another idea, almost as radical. I call it “labor market neutrality.” It’s a call for treating all labor services the same. In particular:

  • Nonemployees would enjoy the same tax advantages as employees under the tax law: if employees are able to obtain health insurance, pensions and other benefits with pre-tax dollars, that same option would be available to nonemployees.
  • On the other hand, if employees are required to purchase unemployment insurance and workers’ compensation insurance, nonemployees would be subject to the same mandate.
  • Regulations would also be the same: the minimum wage law wouldn’t just apply to employees; it would apply to all work, including the work of writers, painters and other artists. (If you can’t get at least $7.25 an hour for the op-ed pieces you write, you would be fined.)
  • Employers would free to do anything for a nonemployee they currently do for an employee — sell health insurance and pension benefits, sell health care, etc.
  • Bottom line: all labor services would be treated the same under tax and regulatory law and all would compete against each other on a level playing field.

Labor market neutrality would accomplish several good objectives:

  1. It would end the fiction that there is something special and different about labor that is done for an “employer” and labor that is done for everybody else.
  2. It would end the fiction that there is something different and special about labor services that are purchased by an “employer” and labor services that are purchased by everybody else.
  3. It would cause us all to rethink whether we want to impose as many restrictions on people as we currently do.


Comments (6)

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  1. Simon says:

    Good post, we have endured enough jobless bitterness. Time for something novel.

  2. Buster says:

    The only reason the government has an interest in whether someone is an independent contractor or an employee is payroll withholding. The primary way the Internal Revenue Service and proponents of income redistribution got Americans to tolerate an income tax was by making it feel as painless as possible for workers. When workers have to set aside and send in money on their own, they realize how much is being paid and resent the amounts. They also tend to cheat on the amounts or owe money they are slow to pay.

  3. Ken says:

    Very good. Very interesting.

  4. Paul H. says:

    Interesting concept. I think I like it.

  5. Tom H. says:

    I like this idea. Especially the part about people who are not employees getting the right to purchase “benefits” with pre-tax dollars.

  6. Brian says:

    I agree with Buster – the bureaucrats and other proponents who feel the need to maintain the income tax system and feed the government with income taxes know that they have to regulate the labor market by making the distinction between the two.

    Also, I would assume that under labor-market neutrality, tax breaks (when given) would be given whether people are hired as employees or as contractors.
    (Another question might be should tax breaks be given to companies that hire temps and part-timers.)