INDEPENDENT CONTRACTORS AND SELF-EMPLOYMENT AS SYSTEMS OF INCENTIVES AND CONTROL: THEORY, EMPIRICS, AND A SURVEY OF EVIDENCE

This paper presents a model and evidence regarding the incidence of independent contractors and the self-employed. It focuses on the rights to control the work routine as an important issue distinguishing employee and non-employee workers. The conditions under which it is optimal for the buyer of labor services to control the work routine (and use employees) and when is it desirable for the seller to have control are considered. The model emphasizes the costs of measuring worker output vs. monitoring worker effort, worker expertise, and worker investment and is tested with Current Population Survey data merged with the Dictionary of Occupational Titles. The empirical findings are broadly consistent with the approach. Independent contractors tend to be in jobs that are harder to monitor and having more worker expertise such as jobs involving more intellectual skills, having a greater variety of duties, and requiring more worker expertise and training. This is even more true of the other self-employed. We also review existing empirical research on self-employment, discussing how it fits into our baseline model and evaluating the arguments to explain independent contractors and self-employment. These include a desire to reduce fringe benefits, demand and staffing uncertainty, wanting to avoid lawsuits for wrongful termination, a desire to protect a reputation for not laying-off employees, credit constraints, and worker desire for flexibility. There is strong evidence that credit constraints have a substantial influence on self-employment status and likewise for worker desire for job flexibility. The literature suggests that the desire to avoid payment of fringe benefits, demand and staffing variability, and avoidance of potential wrongful dismissal lawsuits induces firms to use more temporary agency workers but does not seem to affect the use of independent contractors.