The Modern Labor Market Is Abolishing the Old Master/Servant Framework
Thursday, September 15, 2016
Believe it or not, working at corporations for the majority of one’s career is a relatively recent phenomenon. For centuries, people worked as generalists, often producing essentials such as their own food, clothing, and shelter. Some were able to work in specialized trades, but this was far from the norm. The Industrial Revolution drastically changed the labor market, and large firms and the 20th century model of employment arose. Firms’ employees were able to employ greater specialization and market access in their work, and the world’s productivity soared.
Information technology advancements continue to chip away at the economic advantages of working at large firms.
Over the past 30 years, the workforce has undergone another monumental change—and this change is accelerating at a rapid rate. Information technology advancements continue to chip away at the economic advantages of working at large firms, leading to more independent work. But while the workforce has changed, government policy has not.
In what follows, the Competitive Enterprise Institute’s vice president of strategy Iain Murray shares the main points from his new paper, “Punching the Clock on a Smartphone App?” In his paper, Murray explains why he refers to today’s labor market as the rebirth of Adam Smith’s concept of natural liberty, and what this change means for whoever wins in November’s election.
Jared Meyer: How did we get the multitude of labor regulations that we have today? Specifically, I am thinking of the National Labor Relations Act and Fair Labor Standards Act. Both of these laws were passed in the Depression era, but they continue to exert high levels of influence on the modern labor market.
Iain Murray: What we have to remember is that employment law is based on the principle that your employer is your master, and you are his servant. Policymakers in the 1930s reached the compromise that workers still served their employers, but that the government could make employers provide employees with certain benefits such as sick leave, overtime pay, and the right to collectively bargain.
As the years passed, employers began to think of employees as assets instead of servants.
These laws have tremendous latent power that the Obama administration and its allies have consistently used. For instance, the FLSA defines employment as “to suffer or permit to work.” That means that if you are a volunteer at a for-profit business such as a winery (non-profits are exempt), as far as the law is concerned, you should be being treated as an employee. For years the Department of Labor turned a blind eye to people trampling grapes for fun, but a couple of years ago it started to crack down, fining wineries and consignment sales organizers for accepting volunteer labor.
In the last year or so, the Department of Labor has used its powers in a wide variety of areas. For example, it is misusing the highly technical “joint employer” status to designate large companies as joint employers of workers in smaller companies they contract with. Under the DOL’s view, there is even an argument that Microsoft’s “code of conduct” for its contractors, which is aimed at ensuring that Microsoft’s contractors treat their employees well, makes Microsoft a joint employer.
JM: You argue that labor market policy does not match up with the realities of today’s workforce. Why is this the case?
IM: As the years passed, employers began to think of employees as assets instead of servants—hence the growth of human resource management—and began offering a variety of extra benefits, that were not required by law, to attract and retain talent. This shift in how companies viewed workers led to flexible work hours, telecommuting, and increasingly the use of commercial (independent contractor) contracts rather than employment contracts.
But those 1930s laws remained on the books, and now the Obama administration is using them to compel people to fit into their preferred model of employment, which is master/servant relationship with the government or union as the servant’s champion.
When transaction costs fall, as technology has enabled them to, commercial contracts become more and more appealing.
JM: What spurred this change? Why is the corporate model of employment becoming less relevant by the day?
IM: The economic concept of “transaction costs” is fundamental to understanding all of these changes . If you want to engage in an economic transaction—someone does something for you that you value and will pay for in some form—then there are all sorts of costs that get in the way of a successful transaction. The costs of finding someone to complete a task or provide a good, researching to make sure they are reputable, communicating with them, and settling any disputes are all examples of these costs. It was the Nobel Prize-winning economist Ronald Coase who realized in the 1930s that corporations are formed to cut down on these costs.
The trouble is that commercial arrangements convey all sorts of information on value and scarcity to their participants through the price system. That information gets jumbled in employment contracts, and managers seek ways to bring the price system inside firms. This is why non-essential firm functions are increasingly contracted out, risk is transferred through franchising arrangements, and innovation is spurred by internal markets.
In all of these changes, the move is away from the dominance of the employment contract and towards the commercial contract. When transaction costs fall, as technology has enabled them to, commercial contracts become more and more appealing.
JM: You mention the term “human capital” repeatedly in your paper. Briefly, what do you mean by human capital?
The sharing economy is the natural extension of lower transaction costs.
IM: Human beings are not cogs in a machine, as the first management theorists held. They do not simply bring their backs and hands to a task, they also bring their brains. Recognizing that employees are an asset rather than a liability was the fundamental management breakthrough of the 20th century. A company’s asset base includes its real estate and machines but also its workers—its human capital.
Yet, it is not just employers who possess human capital. Each and every worker has it, and it can be built up through the acquisition of new knowledge and skills. If you have enough human capital, you can use it to found a successful business just as much as you can use an incredible machine. Plumbers and other tradesmen have known this for centuries. Today, intellectual capital is more important than physical capital in many industries, and the government needs to embrace this change instead of hampering its development.
JM: I argue that the sharing economy is the natural extension of lower transaction costs. Firms that easily connect buyers and sellers through platforms truly empower people to purse flexible, individualized, and mobile work. After all, sharing economy work is not limited to driving for Uber. Highly skilled workers, everyone from interior decorators and graphic designers to writers and crafters benefit from increased access to customers. Building upon this, what does the sharing economy tell us about the future of work?
IM: In some ways we are returning to the fundamental nature of human market interaction, which involves people bargaining freely with each other as equals. This is what Adam Smith called “the system of natural liberty.” Transaction cost efficiencies shifted much of work from the marketplace into employment during the industrial revolution and afterwards, but people, especially in free societies, have always bridled at what employment implies in terms of giving up natural liberty.
Where there are two-sided markets, the DOL should bow out of trying to treat people who work using the platform as its employees.
As I mentioned before, companies have offered better and better terms to their workers in terms of benefits that fit with this desire for freedom. You can see this in the popularity of ideas like Tim Ferris’ “The 4 Hour Workweek.” People value their freedom at work, and would prefer to be their own boss . You have drawn attention to the fact that two-thirds of millennials want to start their own business.
Of course, there is an implicit contradiction between this world, where lower transaction costs and entrepreneurial aspirations are taking us, and the highly-regulated world of employment that the Obama administration wants. This could be the major policy fight of the next decade.
JM: Both entrepreneurship and more work opportunities get a lot of lip service on the campaign trail, but whoever wins in November has a major role in shaping the future of independent work. What advice would you give to the next president to promote—or at least not stymie—the movement away from the centuries-old “master-servant” relationship?
IM: I would tell the Wage and Hour Division of the Department of Labor to lay off companies that are trying to find new ways of providing services. I would insist that it develop a series of tests for whether the platform companies that comprise the sharing economy are creating two-sided markets, where equal parties come together in a commercial contract (think of Airbnb, where the company brings together hosts and guests). Where there are two-sided markets, the DOL should bow out of trying to treat people who work using the platform as its employees.
I would also appoint a Chairman of the National Labor Relations Board who is an enthusiast for NLRB reform. The board has an uncomfortable dual role as prosecutor and jury that needs reform, and is hopelessly politicized. Both of those realities need to change.
Finally, I would work with Congress to appoint a commission to look at the most fundamental problem in employment regulation—the master/servant framework—and promote recommendations that recognize the return to independent work.
JM: The next president will have a lot of work to do when it comes to reforming the labor market, but he or she needs to keep in mind that the nature of work has changed for the better because of lower transaction costs. Instead of pursuing policies that direct everyone to have a boss, punch a time card, and join a union, labor regulation needs to promote work that is flexible, individualized, and mobile . Simply put, there is no reason to force a 20th century regulatory model on the 21st century labor market.