This article originally appeared on The Hill.
Getting economic development right is complex. Many factors come into play: workforce quality, infrastructure, industry mix, corporate citizenry, quality of place and creation of new jobs. It is not just the number of jobs that influence decisions about if and how much in incentives a locality might offer a business to set up shop.
Jobs generate the standard of living for the private sector and taxes for the public sector, and the value of those jobs are felt from the business doing the hiring and those employed by that business’s supply chain, like the coffee shop across the street that now has more customers.
But what is a job? How is it measured in the economic development arena? For most of us, a job is the effort we undertake to make a living, and, if we are lucky, to express our passions through our employment. For the economic developer, a “job” as it relates to business incentives can be typically defined as full-time, permanent, direct employment for the business in question.
However, a growing trend in today’s post-Great Recession workforce has served to increase the space between this definition and reality: contract employment.
Businesses are turning more and more to contract workers to fulfill what historically had been served by direct employees. In fact, according to a report by the U.S. Government Accountability Office
, contingent employment now represents about 40 percent of the national workforce.
Further, in recent years, the line between independent contractor and employee has blurred to the point that Uber and California have been dueling with each other over the exact nature of Uber’s workforce. The issues of “employee” versus “independent contractor” exist beyond the Ubers of the world.
If a business is considering where to locate an expansion of their operations — an operation that will consist largely of independent contractors and other contingent jobs — should that workforce be qualified for tax incentives consideration? Contractors do not fit the traditional definition, and yet these jobs provide a livelihood, as well as a flexibility that many younger workers crave.
Today’s workforce has evolved significantly. My grandparents’ generation stuck with the same employer for decades. My parents’ generation stayed within the same industry. Today’s generation is more footloose and values flexibility more than ever. But work is still work: wages are paid, taxes are paid, and economic activity is stimulated.
Many states use economic development incentives based on employee payroll taxes. A W-2 tax form is provided to employees but not typically to independent contractors. Contractors are technically considered self-employed, even though in practice they may be operationally and exclusively working for a business not of their own.
These non-employee workers are paid for their services, and when it comes to tax time they receive a form 1099 as opposed to a W-2, as they are not on the payroll of the business in question. Many states credit an incentive for a business that hires employees for its operation, but deny a business that relies on independent contractors, even though it may have an identical operation except for utilizing contractors.
From the perspective of policymakers, while the business operation may be the same, the very nature of contract employment means the relationship between business and worker is weaker. The independent contractor in some cases is not guaranteed healthcare, liability, paid time off, or many of the same life-enhancing features of actual direct employment. There are certainly legitimate reasons for government to want to incentivize direct employment.
What does this rise in contingent employment mean for economic development? It means that economic development organizations are increasingly confronted with challenges to their traditional definition of a “job.” Businesses deciding where to set up shop are also challenged by unclear and inconsistent guidance from state and local economic development organizations.
The time has come for economic development groups and policymakers to question and clarify existing policies on contingent workforce. This effort will not be easy. Do policymakers meet the growing demand of contingent employment by using incentives in cases of independent contracting? Or do policymakers limit incentives only to direct employment in order to ensure employee benefits and the like? Perhaps there is a middle ground of allowing independent contractors to qualify as “jobs” provided the applying business affords certain benefits.
It is difficult to garner consensus on this question, but it is a necessary and important task when it comes to using economic development programs to incentivize site decisions.