Category Archives: Economics

The Spectrum Case against AB5

California’s Assembly Bill 5 (AB5) is intended to classify more independent contractors as formal employees. The goal is for workers to get higher wages and benefits. It is aimed mostly at rideshare and food delivery companies like Uber, Lyft, and GrubHub, but thousands of other workers are losing their jobs in other fields from journalism to entertainment to business consultants. These unintended consequences are almost exactly what Ryan Radia predicted in a CEI study published shortly before AB5 came into effect.

Part of AB5’s problem is that it comes from a fundamental misunderstanding of the labor market. It treats workers as either contractors or formal employees, but that is not an either/or question. The labor market is a wide-ranging spectrum, not a simple binary. There are all kinds of in-betweens, nuances, and complications.

AB5 uses what is called an ABC test to determine if a worker is an independent contractor or a formal employee. It consists of three questions:

  1. How closely is each worker supervised or directed? Do they check in with a boss every day? Or do they work mostly on their own and have wide discretion on how to do their job?
  2. Is their work part of the company’s core business? For an Uber driver, the answer is yes. For an accountant or a maintenance worker, maybe not.
  3. Is the hiring company the contractor’s sole or dominant customer? Is the job mostly in the contractor’s area of specialty or expertise?

The bill text is vaguely worded. In practice, nearly any freelancer qualifies as a formal employee under AB5. But a lot of job arrangements are somewhere in between.

Legislators have come up with two categories to describe a spectrum with countless categories. AB5 is a clunky piece of legislation, and thousands of workers are paying the price.

Take actors, for a classic California example. Acting is a classic gig-oriented job. But some actors have steady gigs. Filming a one-off movie or commercial is almost surely in the independent contractor category. But what if an actor has repeat dealings with the same studio? In the old days, many actors had exclusive contracts with a studio, and were likely employees under most reasonable definitions. But what if an actor has a non-exclusive contract but still appears in multiple films in the same movie franchise, like the Marvel Cinematic Universe? Where should that fall on the ABC test? It could go either way. Under AB5, politicians make the decision, not the employee.

What if an actor works on two or more unrelated films with different producers and directors, but that are produced by the same studio? Or multiple movies with the same production team, but released by different studios? Are those treated differently than the Marvel movie actor under the ABC test? Workers don’t get to make that choice under AB5.

What if an actor becomes a regular go-to person for an advertising agency and does regular commercials for them, but never signs a contract and does other acting work, too? At what point on this broad spectrum does the actor pass from one category to the other? It will take years of case-by-case political decisions, and likely many lawsuits to give clarity to AB5’s broad wording. Many workers just don’t have the time or money to be without work while these new problems wind through the court system.

And it’s more than Hollywood actors. The Los Angeles Times reports about how AB5 is affecting fine artists:

We received more than 120 responses from artists across California — jazz and classical musicians, directors of arts nonprofits, magicians, costume designers, actors, a burlesque dancer and freelance food stylist, among others.

The overwhelming majority said AB5 is hurting their careers. Many are unsure how to comply with the law. Others are cutting back on programming or canceling services because of the cost required to convert independent contractors to employees.

This is the same spectrum problem. Rather than trying to fit real-world people into tidy regulatory categories, policy should allow workers to choose their own work arrangements.

The old workplace ideal of the 1950s doesn’t apply in the 2020s. Back then, the ideal was to have a Monday-to-Friday job, first shift, always at the same office, with everyone on the same company insurance and pension plan. And where possible, the gig was often intended to be for life, or at least until retirement.

Today’s workers want more diverse choices than their parents and grandparents had. Some people like the traditional model; it’s still there for them. Other people like being able to work from home or from a café some days. Other people like the kinds of jobs available in big cities like New York, but don’t necessarily want to live there. According to GlobalWorkplaceAnalytics.com, the number of telecommuters increased 173 percent from 2005 to 2019.

Not everyone wants to work traditional hours. For people with young kids or other family responsibilities, or who are in school, that is often not possible. Other workers do want a 40-hour schedule, but prefer to work four 10-hour days instead of five eight-hour days to get an extra day at home with kids.

Many rideshare drivers are retirees who want to have something to do, but don’t want scheduled hours. Others are people who are between jobs and use ridesharing as a way to make ends meet while they look for their next 9-to-5 gig. AB5’s rigid categorization hurts these workers at various places along the contractor-employee spectrum.

Other workers want more flexibility with their benefits. Don’t like the company health insurance plan? Would you prefer a different retirement savings plan? Tough, say AB5 supporters. Some workers prefer higher wages with fewer benefits. Other workers prefer the opposite. It is much more difficult for employers to accommodate diverse preferences under AB5.

That’s the main reason why independent contracting is becoming more popular. The old model doesn’t fit everybody, so everybody shouldn’t be fit into it. Contractors can choose an insurance and retirement plan that fits their family’s needs and that they can take with them wherever their career takes them. Under the traditional model, if you lose your job, you lose your insurance at the worst possible time. Formal employees who frequently change jobs have to endure hours of unnecessary paperwork changing benefit plans. Independent contractors are spared those headaches.

Californians are learning the hard way that the labor market is a diverse spectrum, not a simplistic two-lump model of contractors and formal employees. Unfortunately, the rest of the country might soon  copy California’s mistake. New York is mulling its own version of AB5. The House of Representatives recently passed the PRO Act, which contains a federal version of AB5’s ABC test. After seeing California’s experiment, hopefully legislators will reconsider.

Antitrust Enforcement in 4-D

Antitrust regulators have long concerned themselves with horizontal and vertical competition, as well as the depth of market concentration. Now they are entering the fourth dimension: time.

The Wall Street Journal reports that “The Federal Trade Commission on Tuesday ordered Amazon.com Inc., Apple Inc., Facebook Inc., Microsoft Corp., and Google owner Alphabet Inc. to provide detailed information about their acquisitions of fledgling firms over the past 10 years.” These deals, which regulators approved at the time, might be undone after the fact.

This is likely illegal. Both federal and state governments are prohibited from making ex post facto laws punishing past actions that were legal when committed. This is a complicated legal question, however. Antitrust law usually comes in the form of judicial decisions, not congressional legislation. The Sherman Act, for example, is only two pages long. Its use of key terms is so vague that judges have been defining and redefining those terms at will for more than a century. In an antitrust case, it is not enough to have truth, justice, and the merits on your side. You must also have the judge.

If regulators follow through with their ex post facto threats and judges agree, they will create enormous uncertainty in the mergers and acquisitions market. Buyers risk prosecution if a deal works out better than expected. The potential chilling effect on competitive behavior is obvious.

Moreover, many of the technologies from years-old acquisitions are so thoroughly merged with the buyer’s operations that unwinding the deals is simply unfeasible. It would be like trying to turn a book back into a tree.

The whole scheme highlights fundamental problems with antitrust law. To see why, let’s step back and take a larger four-dimensional view.

Time

Companies have long risked prosecution for both present and future behavior. But to reach back into the past ex post facto is something new. For example, if a company’s present size is too big for regulators’ tastes, they might break it up. That in-the-moment concern motivated Standard Oil’s 1911 breakup despite its declining market share. It also ended the government’s protection of AT&T’s monopoly in 1984, when regulators decided to allow competition, although in a weird, top-down way. Those cases did not create new offenses out of years-ago actions that were legally permissible at the time.

Antitrust regulators are also concerned with the future. If a company is doing nothing wrong now but might do something bad in the future, some regulators believe they have cause to act now. This is called the incipiency doctrine. For example, if Sprint and T-Mobile merge, will the wireless market become too concentrated, leading to potential future bad behavior? Regulators asked the question. Courts said no, and my colleague Jessica Melugin agrees. Other mergers have been blocked because of possible future effects, as has happened twice with Staples and Office Depot.

Now the distant past is coming into play. Over the last decade, the bigger tech companies, such as Google, Facebook, and Amazon, have bought out as many as 400 startups that had developed promising new products, technologies, or business models. Many of the deals fell below the minimum dollar-value threshold for an antitrust investigation. Regulators approved all of the deals they did examine.

Most of these deals ended up being duds; the rule of thumb is a 90 percent failure rate. But after a decade or so, some of the acquisitions turned out to be important to the bigger companies’ success. Facebook’s 2012 acquisition of Instagram is one example. As Facebook’s primary user base gets older and grayer, Instagram is keeping the company relevant with younger people. Countless algorithms and other under-the-hood technologies that now power different parts of Google and Amazon’s operations were originally developed at acquired firms. Now regulators are mulling undoing these past deals, which were previously approved.

The Horizontal, Vertical, and Depth Dimensions

Regulators should instead use a simpler framework with fewer dimensions. To show why, it is worth asking basic questions about business organization. What if Google or Facebook had come up with the successful technologies in-house, rather than having bought them from elsewhere? Would that be an offense? If not, why should developing them via buyouts be treated differently? This is similar to the lesson from economist David Friedman’s Iowa Car Crop story. It is a distinction without a difference.

My theory is that these sorts of multi-dimensional concerns are rationalizations that distract from the main issue: size. In our extended (and imperfect, but useful) analogy, this is equivalent to the depth dimension. Arguments about ex post facto enforcement or different horizontal and vertical arrangements are, in the end, really about size, or the depth of market competition. What appears to be four-dimensional regulation actually concerns one dimension.

Distractions from the Real Issue: Size

Many members of the Neo-Brandeisian antitrust revival are open about believing, like Justice Louis Brandeis, that large size is an inherent antitrust offense. The arguments investigators are floating about different past, present, and future actions, or about different places along the horizontal and vertical dimensions, are only intended to apply to companies of a certain size or to markets with fewer than a certain number of competitors.

Even the number of competitors in a market is a problematic measure. (I earlier gave two reasons why here and here.) A third way to look at it is this: In a way, startup tech entrepreneurs eager to sell out are similar to independent contractors, similar to the way a company might outsource its payroll to an outside contractor or a family might outsource household repairs to a handyman. Sometimes doing something in-house is better. Sometimes it’s not. Every case is different. But doing something in-house means fewer, and larger, firms in the market. Outsourcing means more, and smaller, firms. One arrangement is not inherently more competitive than the other, yet antitrust regulators treat them differently. This is not a coherent position.

Circumstances also change over time. Maybe a company’s in-house R&D team loses a key person or is stuck in a rut. Sometimes a fresh perspective from an outsider might be helpful. Maybe a contractor is too far away from her customers to communicate with them effectively. Maybe a company is having trouble coordinating multiple outside contractors. In these cases, bringing the contractors in-house could make the companies more competitive, even as it reduces the number of firms in the market.

Competition Is a Spectrum and a Process, Not an On/Off Switch

Even within the outside contractor model, there are lots of places along this vertical dimension. Maybe one company contracts with a startup. Another licenses a startup’s technology and brings it in-house but doesn’t buy the company itself. Maybe the license is exclusive; maybe it isn’t. A third company hires the outside person with the bright idea but doesn’t buy her company. Maybe that person’s team and their equipment are necessary to make the most of that idea. If that’s the case, maybe a buyout is easier, and likely cheaper, than hiring away one or two key people. Maybe another company makes overtures to a horizontal competitor or certain of its employees.

Here we find there are angles between the purely horizontal and the purely vertical. Again, competition is not a binary switch, fully on or fully off. It is a spectrum with all kinds of in-betweens. Competition is a complicated, evolving process with nuances that don’t neatly fit into categories.

Every case is different. Nobody knows in advance which possible course of action is the right one—or if there even is a right one. Remember, as noted, mergers have about a 90 percent failure rate—and each and every one was entered into with confidence.

Here is another way to put it. A company with in-house counsel has essentially bought its own law firm. For antitrust purposes, how is that conceptually different from using an outside attorney? These are two different places on the spectrum of vertical integration, but they irrelevant to market competition.

There are similar concerns for the horizontal spectrum. Some cases require multiple attorneys. What if attorneys from competing firms collaborate on the same side of a case? What if some mix of in-house and outside attorneys work together? The result is the same. People or companies who need legal services buy them in the manner of their choosing. That is not a proper antitrust issue.

Same goes with the mishmash of mergers, acquisitions, and divestitures that have characterized the tech industry for decades. Regulators are only making incoherent multidimensional arguments now because the companies are bigger on the one dimension they really care about: size.

Conclusion

Whatever names we give to the ways big and small companies interact with each other, the end results are not that different. Someone sells something and someone else buys it. The sellers might get paid as employees, vendors, or contractors, or maybe they just take the money and move on to something else.

Why some of these arrangements are considered legitimate antitrust questions while others are not is an important question. Regulators have not given a compelling answer, nor are they likely to.

A final point worth remembering: The reason firms exist in the first place is not to enable or restrict competition. It is to reduce transaction costs. There is no magic number of firms that accomplishes that goal. And if there were, it would constantly move as tastes and technology change. It would certainly move faster than the speed of antitrust litigation. Competition is an ongoing discovery process.

Antitrust regulation fails along all four dimensions—the vertical, the horizontal, depth, and time. It should be entirely repealed. At the very least, the Justice Department should immediately stop its search for ex post facto offenses against Amazon, Apple, Facebook, Google, and Microsoft.

For more problems with antitrust regulation, see Wayne Crews’ and my paper, “The Case against Antitrust Law.”

In the News: Pro Act

The Washington Examiner‘s Sean Higgins quotes me in an article on the PRO Act, a labor policy bill the House will likely vote on this Thursday:

That’s close enough to card check, said Ryan Young, senior fellow for the Competitive Enterprise Institute, since it means that unions could in theory be granted recognition even if it is unclear whether they would have won an election. “The PRO Act shifts the burden of proof onto the employer for proving they didn’t interfere in an election,” Young said. “Currently, it’s innocent until proven guilty. The PRO Act would reverse that.”

The PRO Act rules would encourage unions to try to game the system by pushing for recognition if they feel the current NLRB is sympathetic, Young said. The board’s majority is nominated by the president and as a result typically moves along with the current administration.

Read the whole thing here. I previously wrote about the PRO Act here.

I will also be doing a radio interview later today with Rick Trader on his syndicated Conservative Commandos show.

House to Vote on PRO Act This Week

The House of Representatives is expected to vote this week on the Protecting the Right to Organize (PRO) Act. The legislation’s goal is to increase union membership. It has significant negative tradeoffs for workers, as my former CEI colleague Trey Kovacs and several others pointed out in a recent paper. Specifically, the bill would:

  • Essentially nullify 28 states’ right to work laws. In these states, workers at a unionized workplace may choose whether or not they want the union to represent them. The PRO Act would require non-union workers to pay union dues as a condition of employment, even when they opt out of union representation.
  • Force employers to provide unions with employees’ personal information, including home addresses, working hours, phone numbers, and email addresses. Unions have already used such information before to pressure workers to support unionization campaigns. As Kovacs writes: “In one example, the Communication Workers of America Local 1103 used a workers’ personal data to sign her up for unwanted magazine subscriptions and consumer products. She was billed thousands of dollars and had to spend hours each day unsubscribing herself.”
  • Codify “card-check” organizing, which was abused during an organizing drive at Volkswagen’s Chattanooga, Tennessee plant. Eight workers publicly complained that the union told them the cards they were asked to sign were not votes in favor of unionization. The union later used those cards as proof that workers wanted to unionize the plant. In another incident, an organizer for the United Steelworkers was asked to threaten migrant workers by reporting them to immigration officials if they did not support unionizing their workplace. The organizer quit rather than follow orders. The PRO Act, by codifying card check, along with the provision for mandatory disclosure of workers’ personal information to unions, would make such abuses much easier to carry out.
  • Change the definition of terms such as “joint employer” to make it easier to unionize contract workers and franchises. Changes to the definition of “employee” would add restrictions and reduce workplace flexibility so more workers become union-eligible, even if the affected workers do not want those restrictions.

While the PRO Act will likely pass the House, the Senate is unlikely to consider the bill. But as essentially a wish-list item for a major political constituency, some version of the PRO Act will likely be reintroduced when the 117th Congress convenes next January.

Alfred Marshall on Free Trade

Here is a gem of a quotation by Alfred Marshall on free trade, unearthed by Doug Irwin on p. 221 of his 1996 book Against the Tide: An Intellectual History of Free Trade: 

“[Free trade] is not a device, but the absence of any device. A device contrived to deal with any set of conditions must become obsolete when they change. The simplicity and naturalness of Free Trade–that is, the absence of any device–may continue to outweigh the series of different small gains which could be obtained by any manipulation of tariffs, however scientific and astute.”

In the News: Trade Policy in 2020

The Washington Examiner‘s Sean Higgins quotes me in a piece looking at possible developments in trade policy in 2020, now that China Phase One and USMCA are finished:

Ryan Young, a trade policy expert with the libertarian Competitive Enterprise Institute, nevertheless sees the threat of renewed trade wars as low for the foreseeable future. The administration has an interest in not stirring things up too much before the fall elections, he said. “Of course, with this administration, things can change with a single tweet,” he said.

Read the whole thing here.

In the News: China Phase One Trade Deal

I am briefly quoted in a lengthy Washington Times story about the Phase One trade deal with China that was signed this week.