In recent years there has been discussion of limiting or eliminating independent contractor status for workers in the United States, an option currently protected by federal tax law. Such a change would be costly for home builders and other small businesses, who rely on independent contractors to provide services that are not used in a large enough quantity (or over a sustained period of time) to justify a full-time position within their business.
The economics of why this occurs in the construction sector can be seen in the data. We recently examined JOLTS data from the Bureau of Labor Statistics and noted that the number of open positions in construction has been growing since the depths of the recession. The JOLTS data also allow us to examine the amount of job turnover, an indicator of labor markets for which independent contractor rules make economic sense.
The graph above charts hiring rates over the duration of the JOLTS data, which began in 2001. Clearly, the construction sector has a larger hiring rate than the economy as a whole over the entire period. The effects of the Great Recession can be seen in a reduced hiring rate over the 2006-2009, with a small rebound occurring recently. It should be noted that the vertical axis measures hiring as a percentage of the labor force, so given the dramatic job losses in the residential construction sector (more than 1.4 million), a small nominal number of hirings in today’s environment produces the same hiring rate as a larger number would have six years ago. The impacts of the recession on the national economy (excepting farm employment) can also be seen on this graph in the form of a reduced hiring rate starting in 2008.
Similar conclusions can be drawn from the following graph illustrating the separation rate for workers in the construction sector and the economy as a whole.
The most important fact to notice here is the higher rate of separations for the construction sector. “Separations” are defined as the sum of (1) layoffs and discharges; (2) quits; and (3) and other separations.
Taken together, the higher rates of both hiring and separations for the construction sector are consistent with a market that has high worker turnover due to seasonal and contract- or project-based labor needs.
Such “lumpy” demand for workers results in high turnover as contracts are begun and completed, typically under weather constraints. Moreover, with respect to separations, the data clearly indicate that while the categories for the rates of quits and other separations for construction are comparable with the rest of the economy, the layoffs/discharges separation rate is twice as high.
Overall, the JOLTS data for the construction sector reveal an industry with high rates of worker turnover. For such industries, independent contractor status makes a good deal of economic sense as it provides the flexibility to link demand for workers with available supply. And given the current weakness in economic growth, the economy needs more flexibility in this regard, not less.