As you know, a trend that is starting to receive attention is small business outsourcing. Specifically, are we evolving into a free-agent nation in which fewer and fewer of us are engaged in traditional employer-employee relationships and more and more of us are available to organizations on a plug-and-play basis as freelancing independent contractors? Is our economy evolving into one in which traditional employment is going the way of the dinosaurs? Will many of us be used by employers on a plug-and-play basis? -- "I need you now, you're hired as a contractor; I don't need you now, bye. See you next time I need you."
Here's what I noticed in our data that supports the idea. Last tax year, in 2002, 4.2% of our compensation payments went to independent contractors (i.e. individuals who received a 1099 tax form) and the remainder went to employees (i.e. individuals who received a W2 tax form). This 2003 tax year, we are tracking on 4.7% of the total going to independent contractors.
As such, we see a statistically significant uptick in the use of independent contractors at small businesses.
Interestingly, Andrew Sum, the director of Northeastern University's Center for Labor Market Studies sees the same pattern. His analysis suggests that use of independent contractors explains the 3.1-million-job difference between employment calculated via the government's payroll survey (which is oblivious to independent contractors) and the government's household survey (which asks about independent contractors). The gap in the two employment reports is about 10 times the average gap found after the previous five recessions, historically unprecedented according to Sum who believes that people are turning to informal contracting relationships to get by -- living off the land so to speak -- more than ever before.
Discussions with our small business clients indicate that their expanded use of independent contractors is based on their desire to manage their costs and enhance their organizational flexibility - in other words, they don't want to lock into the higher cost structures associated with hiring employees if they can avoid it. Moreover, they indicate that there is a better supply of talented freelancers available now than in previous years and at a better cost; clearly, there's a lot of talent still floating around in this jobless recovery looking for a spot to land.
I've also encountered small businesses that are outsourcing projects to India, the Ukraine, etc. - they can find offshore contractors via web-based services - one friend paid a Ukrainian contractor $100 to do a project that would have cost $1,500 if he used a U.S. contractor - no payroll overhead or U.S tax collection on the transaction; just put it on his credit card and will deduct the expense. Think of the implications of that trend! It's one thing for GE to outsource to India -- it's another thing when Wanda's Hair Salon outsources its accounting to Bangalore. To me, offshore labor arbitrage may be the biggest economic story for 2004.
Mind you, we have excellent visibility into the rise and fall of 1099s because every payroll period our clients pay their independent contractors via our service. Even the U.S. government doesn't know how many independent contractors are being employed mid-year because, in contrast to W2 tax filing, they only see the 1099 reporting at the end of the year when 1099s are generated and filed.
Whether this data portends a larger trend remains to be seen. Is this a jobless recovery or is there a major transformation occuring that is redefining employment into something entirely new and different? What are the implications for American workers? What are the implications for the world economy?
Thanks for letting me share my thoughts and observations with you.
Best regards,
Michael D. Alter
President
SurePayroll
www.SurePayroll.com
