What happens to the economy when everyone is their own business?

Since industrialization took people off the farm and sent them to factories, people have depended on the health of businesses for their survival. Most people for the past 150 years have worked for a company. Our tax system depends on this as well. Payroll taxes represent a significant share of revenue for governments. 

However, the economy is changing. Companies are bringing in new staff on a contract basis leaving them to pay their own taxes, rather than employees sharing that burden with their employer and leaving employees only as secure in their position as the length of their contract. For corporations, this is a huge cost savings. However, it can be a raw deal for employees who find themselves in a precarious position with more costs. 

The Sad Story of Tyson Chicken

The trend of reducing the amount of people actually employed by certain corporate entities is a long time trend in certain industries. In the 1970s, Tyson Chicken found that their biggest corporate expense, was growing chickens. To offset this expense, they started to contract with farmers on an independent basis to grow chickens for the company to their requirements. Tyson only had to buy the chickens at a fixed price per pound while off-loading all the expense of growing chickens to the contracted farmer. For many small farmers, this has backfired and caused bankruptcy.

The stories are harrowing. Families make huge investments in land and in chicken houses that cost $250,000 to build and then something goes wrong and they lose everything, sometimes ending up homeless in the process. It’s almost feudal, how people are treated when they sign up to work for Big Ag.

Farmers, even when they aren’t working for a big chicken producer like Tyson can end signing up for millions of dollars in contracts and taking on huge debts in order for the opportunity to make money in the business. Costco is contracting with farmers through its chicken subsidiary to produce more poultry for the retailer. The contracts are not flock-to-flock like Tyson but are for a period of years where even if there is a bad year, farmers can recover.

What Does It Mean to Work At A Company?

Contracting out certain building services has been a slow burning trend in the economy. The first people to be affected by this trend were cafeteria and janitorial workers. Rather than employ those people directly, companies hired other companies who provide those services to them. Security Guards are frequently hired by a firm and don’t work directly for a company or even the commercial property management. Someone can work at One World Trade Center or the Space Needle but not be actually connected to the management company involved.

For corporate management, this is a tremendous way to cut costs. They can contract with a company for a flat rate for services rendered and not have to deal with additional HR, payroll, benefits, or management connected with the people doing the work.

Until the 1980s, a permanent position was just that. Permanent, the position always existed and as long as you did enough to meet your next performance review, you had the job. Barring any significant behavioral problems, employees could stay in a job for decades. However, fast forward 30 years and now we read articles about the only job security existing within oneself and that any loyalty to a company is simply bad for your career. This means that constant skill acquisition and constant moving around are now more common than ever before.

The Rise of the Independent Contractor

What can we learn from the plight of poultry farmers and janitors? The method of off-loading employment costs off onto the employees themselves is quickly coming to a workplace near you. Google has an army of independent contractors that work on site but have different badges and cannot access the same services as a regular Google employee. Independent contractors don’t get benefits are Google and are responsible for all their own taxes including social security tax which is 12.6% for self-employed people.

In many workplaces, independent contractors regularly mix and mingle with regular employees despite doing the same work for essentially less compensation. There is also a lack of consistency. Independent contractors work on a contract basis, often only for a project or a short-term period of 1-5 years. Whether the contract will or will not be renewed is a constant question, leaving the contractor in the lurch when the contract ends and they must move on to another opportunity, supposing that one is available.

Leaving People Out In The Cold

In the 19th century, factories would regularly open and close and often would hire and layoff employees on a regular basis. For the workers, there were no protections, no unemployment insurance, and no safety net. Sound familiar? It should, because that is the future of work in most developed economies.

The downsides to the regular economy are quite dire. Without consistent employment, people will be forced to be constantly moving around to wherever the jobs are. That means uprooting families and leaving friends and family behind for a new opportunity. In families where both couples work, this can be difficult because then two jobs, in a new location needs to be found in an economy where jobs are constantly moving and changing. For white collar workers, these transitions may be easier and it is certainly easier in fields where there is high demand. However, for blue collar workers and other regular working people, they can be left with insufficient funds and an insufficient social safety net to make those transitions. Eviction and homeless can follow. One of the things that has deeply effected the United States is the decrease in high-pay manufacturing jobs, especially in the mid-west. Nothing has come along to replace those jobs and the people left behind either have to grind in poverty or uproot for job opportunities elsewhere. That is one of the reasons why major U.S. cities have seen such growth in the past decade. That is where the jobs are being created.

Service Providers

With the advent of the internet, many people thought that many office jobs could be outsourced to people working from home instead of showing up to an office. As contractors they could work wherever as they were able to provide the service they were being paid to perform. One of the areas where this has been tried is in the call center space. Companies like Timberline and Arise hire workers on a contract basis to answer phones for major companies like Disney, Home Depot and others. However, this is a precarious position for the workers. Their contracts can be terminated at any time, often with little reason given as to why it was terminated. How are you supposed to plan for major expenses or even day to day survival, when you could wake up the next morning and essentially not have a job anymore.

How to Navigate This Paradigm

It’s unlikely that this economic trend will reverse itself. How does the regular worker navigate this environment? While there is no loyalty to any company or any job, it also means that everything is negotiable. That means in simple terms that you either need to understand the length of your contract and plan accordingly for the financial impact of your contract ending. This means negotiating on compensation and using tax tools to plan for your tax bill for both state and local taxes. This also means making sure that you’re ready to move at any time to take advantage of a new opportunity. We wonder why Millennials aren’t buying houses and while the financial factors are the primary reason, there is also the precarious nature of modern employment. They never know when they’ll need to move in order to take a new job.

The Economy of The Future

It’s easy to see that in the near future there will be very few people actually employed by corporate entities. Everyone will essentially be a glorified service provider who works on a contingent basis. When a company needs the service, they will use the people contracted to provide that service. When the company no longer needs to the service or chooses to end a project, the contract simply ends the workers have to move on. For wealthier workers, this will be an easier transition. For regular working class people, as we’ve found with the government shut down, those transitions can be very painful.