Disguised Unemployment
How Prop 22 undermines the stability of California’s unemployment system
In November 2020, after the most expensive ballot initiative in California’s history, Uber, Lyft, and Instacart cemented the legal status of their workers as outside the reach of the state’s labor laws. The ballot initiative, known as Proposition 22, overrode both the California legislature and the state’s courts to exempt app-based transportation and delivery workers from basic labor rights and protections, such as minimum wage, overtime, and unemployment insurance. This means that gig employers in California will no longer have to pay into the state’s unemployment insurance fund, and gig workers will not be eligible to receive unemployment benefits. While some gig economy advocates argue that easy access to on-demand gig work through an app makes it less important for workers to have access to unemployment insurance, this is not true. In fact, shunting laid-off workers into the gig economy is a poor alternative to unemployment insurance, because it underutilizes workers who would be more productively employed in different jobs, while also hindering them from finding those jobs.
…shunting laid-off workers into the gig economy is a poor alternative to unemployment insurance…
This is not to deny that on-demand gig work makes it easy for anyone to quickly earn income: it does. The issue is the benefits and costs of gig employment relative to robust unemployment insurance. On the benefits side, some argue that gig companies release otherwise idle labor resources into the economy, by allowing more people to join the part-time labor force. Others argue that gig work, by helping the unemployed rapidly re-enter the labor force, improves worker well-being and helps reduce reliance on public assistance. In a recent paper entitled “Trading Safety Nets for Steering Wheels,” a trio of scholars found that the entry of Uber into a local labor market reduces reliance on unemployment insurance by 4.8 percent, and worker outstanding debt balances by 1.3 percent. These arguments suggest that gig employment boosts worker incomes and the economy by lowering the number of idle workers collecting unemployment.
Charles Dickens’ “Ebenezer Scrooge”, one might recall, also praised the virtues of low-paying work relative to social insurance. In A Christmas Carol, Scrooge asked volunteers collecting relief for the poor why the relief was necessary, when the destitute had the option of reporting to the workhouses (notorious Victorian-era institutions that forced welfare recipients to perform hard labor). If they refused to report to the workhouse, Scrooge added, they should die, “and decrease the surplus population.” While Scrooge’s Victorian capitalist morality prioritized punishing the poor, the goal of social insurance now is to improve outcomes for workers and the broader economy. On that score, if driving for sub-minimum wages at Uber is a better option than applying for unemployment insurance, that says more about the stinginess and inaccessibility of the current unemployment system than it does about the virtues of Uber. Raising unemployment benefit levels and making it easier to sign up to receive benefits would be a more direct way of alleviating the debt burdens of the unemployed.
Raising unemployment benefit levels and making it easier to sign up to receive benefits would be a more direct way of alleviating the debt burdens of the unemployed.
But there are other problems beyond simple Scrooge-like miserliness with replacing safety nets with modern workhouses on wheels. As the great Twentieth century economist Joan Robinson argued during the Great Depression, an economy that funnels laid-off workers into temporary gigs has not eliminated unemployment so much as disguised it. In a market economy functioning at full employment, meaning anyone who wants a job can have one, workers are matched with the jobs where they can be most productive (in the strictly economic sense of generating market value). This is because, roughly speaking, more productive workers are paid more highly, and workers generally choose to work in the jobs where they can earn the most money. (While there are many reasons why workers are typically not paid their full value, some of it being appropriated by their employers, this description is good enough for our purposes here.) When the demand for goods and services falls, due to a financial crisis like in 2008 or a pandemic as in 2020, companies lose revenue and lay off workers. Workers who are willing and able to work then become involuntarily unemployed. In order to provide relief to workers who lose their jobs through no fault of their own, and to prevent the consumer spending that powers the economy from evaporating, the government provides unemployment benefits to unemployed workers.
However, Robinson recognized that in a society without unemployment insurance, laid off workers have to immediately try to eke out a living however they can, doing things like (in Robinson’s time) selling matchsticks on the street or digging potatoes on allotments. The kinds of occupations that laid-off workers take up, whether selling matchsticks or delivering food, are typically less productive than the activities they were doing before losing their jobs. This means that in times of economic recession, the true amount of unemployment is not adequately measured by the official unemployment number of completely idle workers, but rather by the magnitude of the underutilization of workers’ full energies and abilities. While in a superficial sense all people are always employed all the time, because they are always doing something, when workers are transferred from the jobs they were doing during periods of full employment to tasks which do not use their accumulated skills and training, employment cannot really be said to have been unchanged.
…replacing unemployment insurance with gig work can actively prevent the unemployed from finding the kind of jobs they are best-suited to taking.
What is more, replacing unemployment insurance with gig work can actively prevent the unemployed from finding the kind of jobs they are best-suited to taking. As a recent National Bureau of Economic Research working paper shows, generous unemployment benefits give workers the breathing space they need to find the right job where they are most valued and productive. In other words, by not being forced into doing gigs or other temporary work to scratch out a living, unemployment insurance improves employer-employee matches and benefits the overall economy by putting workers into the jobs where they are most productive.
Of course, there are lots of valuable jobs that are “low productivity” in the economic sense of generating market value. The service sector in general, including extremely socially valuable jobs, such as caring for children and the elderly, is lower productivity than manufacturing; crucial service jobs in the care sector are vastly undervalued by the private market. However, because the public benefits of the care sector outweigh the private benefits captured by private market actors, only the public sector can adequately fund care work. The gig economy in particular, and the private market in general, will always underprovide services with narrow private profit but broad social benefit.
Gig work is no substitute for a functioning and generous unemployment insurance system.
Gig work is no substitute for a functioning and generous unemployment insurance system. However, Proposition 22 means that gig employers no longer have to pay into California’s system, undermining its sustainability. Gig employers are already trying to expand their California exemption from labor laws and unemployment insurance to other states. While the gig economy’s cheerleaders argue that replacing unemployment and idleness with on-demand work provides benefits to workers and the overall economy, Joan Robinson gives us good reasons to be skeptical.
Brian Callaci is an economist and postdoctoral scholar on Data & Society’s Labor Futures initiative.
