Federal Programs Should Protect Self-Employed Workers

The online economy has created many new opportunities for individuals to work independently of large firms. This leaves them more exposed, however, to economic risks and without the insurance benefits major employers typically provide. Instead of restricting the development of these new jobs, policymakers should restructure social insurance programs to accommodate those not employed by a single firm for the bulk of their careers.

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The rise of gig work, alongside that of the digital economy, has drawn considerable attention in recent years. Online technologies have made it possible for skilled programmers, writers, designers, consultants, and entertainers to sell their services directly to clients without the need for employment by a single firm. Companies such as Uber, Lyft, DoorDash, and Instacart have allowed people to receive paid employment immediately, without extensive training, hiring processes, or long-term commitments.

Yet even today most independents work in professions that preceded the digital economy, such as agriculture, construction, real estate, trucking, and childcare. In July 2023, 13 percent of U.S. workers were independent, contract, or on-call workers—a proportion that has not greatly increased over recent decades.

Independent workers miss out on many fringe benefits associated with regular employment, such as disability insurance, life insurance, or health insurance. They are also ineligible for paid family or medical leave. In 2022, the proportion of self-employed adults lacking health insurance (18 percent) was substantially higher than that among all working-age adults (12 percent).

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These disparities result to some extent from tax policy. For the best part of a century, businesses have provided health insurance, pensions, and other fringe benefits to employees with pretax dollars—perks that self-employed workers did not enjoy.

But today’s private employers rarely provide defined-benefit pensions, while independent workers can now also make tax-deferred contributions to Individual Retirement Arrangements and Solo 401(k)s. Low-income workers lacking an offer of employer-sponsored health insurance are now entitled to federal subsidies whose value typically exceeds that of the tax exemption for employer health benefits. It is only higher-income workers, still subject to payroll taxes on income used to purchase health-insurance benefits for themselves, who remain relatively disadvantaged.

To fill this gap, Joel White, David Hyman, and Ge Bai have recently proposed enabling multiple companies to make tax-exempt contributions to gig workers’ health savings accounts. Similarly, economist Jonathan Gruber has suggested letting multiple employers contribute pretax funds for workers to use for retirement benefits and emergency savings.

But the biggest risk facing the self-employed is that their incomes may fall as demand for their work declines. Small business owners cannot purchase insurance against downturns in sales, while public unemployment insurance benefits specifically exclude the self-employed. By failing to cover those whose incomes are most uncertain, American unemployment insurance fails to help the workers who need it most.

Some states, like California, have sought to extend labor laws to gig workers. This approach is counterproductive because it eliminates the flexibility that makes such employment attractive. Most gig work is side work rather than a primary source of employment. Only 20 percent of Uber drivers earn more than half of their income from driving. Indeed, the absence of commitments is what enables drivers to use Uber to make up work shortfalls from other jobs.

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We could make unemployment assistance available to independent workers by changing the nature of the program. Instead of an entitlement, triggered when an employer fires an employee, unemployment compensation could be turned into a tax-rebate loan. Any worker, including the self-employed, who needs assistance could claim back payroll-tax contributions made over the previous two years, repaying them after returning to employment. That would give self-employed workers credit for tax contributions they have already made and provide them benefits equivalent to current levels, while also deterring individuals from claiming benefits they don’t need. Such an arrangement could also be structured to allow self-employed households to receive financial support when they need to take family and medical leave.

The nature of employment has changed. Federal programs to protect workers should evolve, too.

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