Welcome To The 1099 Economy

Structural employment within the U.S. economy has been experiencing a dramatic transformation over the past two decades, and the government’s household employment figures do not seem to be capturing this trend. Month after month, analysts and pundits comb through the reported employment figures in search of signs of optimism from the Bureau of Labor Statistics (BLS). And, every month, these market specialists find justifications for a persistently falling labor participation rate (Figure #1).

Fig. #1
Labor Participation Rate From 01/1948 to 11/2015

Source: EverBank Research Team, based on an analysis of publicly available data from the St. Louis Federal Reserve FRED Database.

The development mentioned above is the growth of the “1099 Economy,” also known as the On-Demand Economy, the Sharing Economy, or the “Gig” Economy (as it is fashionably termed by the Millennial generation). It’s a trend where workers are forgoing the traditional corporate employment paradigm to pursue the flexibility and independence of a freelance or contract worker. The expression 1099 Economy is in reference to the Internal Revenue Service form 1099-MISC, in which freelance and contract income is reported to the IRS for income tax purposes. Rather than using the standard W-2 form to report employee earnings to the IRS, companies paying independent contractors will report relevant payments to persons or unincorporated businesses on form 1099-MISC, Miscellaneous Income.1

The concept of an independent employee is by no means a new idea, but the decision by professionals to actively pursue careers as contract or freelance employees is a relatively recent phenomena. Generally speaking, these non-traditional work arrangements have historically been viewed as substandard, low-income jobs with low rates of health insurance and job instability, chosen only during periods of economic or personal duress. However, advances in technology and communications, and greater availability to health insurance alternatives, have provided an environment more conducive for workers to strike out on their own.

Measuring The 1099 Economy
In 1999, the BLS conducted a special survey to measure the proportion of workforce consisting of independent contractors, on-call workers, temporary employees, and contractors.2 The study found that 9.3% of the workforce in 1999 was represented by alternative work arrangements and, in fact, down from a rate of 9.8% in 1995.3 The November 2015 BLS household survey reports 10.2% of those employed were considered self-employed workers, or 15.2 million employees.4

The problem with the figures reported by the BLS in the monthly household survey is that they miss a significant portion of truly “self-employed” workers. In fact, an independent national survey identified that as many as 53 million Americans are working as freelance employees.5 In aggregate, these workers, represented by independent contractors (true freelancers), moonlighters (employees with traditional primary jobs but gaining extra income through freelance jobs), diversified workers (laborers with a mix of part-time and freelance work), temporary workers (temporary employment contract workers), and freelance business owners (freelance owners that hire freelancers), now account for not 10% of the workforce, but rather 34% of the workforce (Figure #2). A similar analysis conducted by the Pew Research Center on 2014 data released by the U.S. Census Bureau found that 30% of U.S. jobs were held by the self-employed or hired by self-employed owners.6

Fig. #2
Types & Numbers of Freelance Workers By Percentage In 2014

Source: EverBank Research Team, based on an analysis of publicly available data from Freelancers Union.

The growth figures for 1099 workers has been notable, which is especially interesting considering the BLS has yet to truly quantify this expanding and potentially vibrant segment of the labor market. To understand how the BLS household survey underrepresents this increasingly important labor force, it is instructive to look at precisely how the household survey figures are collected, and how the BLS calculates the official unemployment rate. On the 19th day of each month, the BLS will survey 60,000 households to ask specific questions regarding each respondent’s labor force activities to determine those who have traditional full time jobs, those who do not, and those still looking. The questionnaire includes standard queries such as:

“Last week, did you do any work for either pay or profit?”
“Last week, did you have a job, either part time or full time?”
“Have you been doing anything to find work in the past four weeks?”

As a casual observer may find, the questions geared toward collecting the BLS monthly data, which have been similar since the survey was first designed in the early 1940s, do not capture the independent and variable nature of the 1099 worker.7 In truth, an independent contractor who completed a project two weeks ago, or who will be beginning a project in a month, would be captured in the government’s unemployment basket, despite being gainfully employed.

As difficult as it may be to believe that there are just 8 million unemployed workers in a civilian labor force of over 157 million, it is equally implausible that nearly 95 million of the civilian non-institutional population are no longer in the labor force (Figure #3). Certain citizens excluded from the active labor force figures are neither employed nor unemployed, including retired persons, students, and caregivers.

Fig. #3
Employment Situation Summary: Household Data For 11/2015

Source: EverBank Research Team, based on an analysis of publicly available data from the Bureau of Labor Statistics.

Is it truly reasonable to assume that 21 million persons between the ages of 25 to 54 are no longer looking for employment, or that 51 million persons over the age of 55 do not want a job?8 Maybe or maybe not, but it’s becoming more plausible that, perhaps, the BLS numbers are ill-equipped to account for those employees who no longer fit into the traditional definition of “employed.”

The Emergence Of The 1099 Worker
Innovation and workforce flexibility have historically been considered the backbones of the U.S. economy, driven by the creativity of entrepreneurs and the persistence of small businesses creating jobs. This narrative is no better illustrated than viewing the cumulative job creation of small businesses versus large businesses over the past decade (Figure #4). Based on the accompanying chart, it is clear that small businesses with less than 500 employees have outpaced job creation by larger entities over the past 10 years. It is in this environment that the 1099 worker should thrive in the future.

Fig. #4
Change In Non-farm Private Employment By Company Size 01/2005 to 11/2015

Source: EverBank Research Team, based on an analysis of publicly available data from ADP Monthly Payroll.

Among the growing number of companies using more contract employment models, Internet transportation companies such as Uber and Lyft have been perfecting the freelance model. These firms have been tapping into the cost and efficiency benefits of employing a contractor-based work model, providing opportunities for both part-time workers to make some extra cash and full-time workers to create a more independent career. Other firms such as Etsy are providing a peer-to-peer marketplace for part-time workers or stay-at-home caregivers to sell handmade or vintage items. Academics can pick up tutoring or test preparation assignments through Varsity Tutors, an online platform connecting students to top-rated instructors. The opportunities for freelancers appear limitless.

The environment for the independent worker has never been better. Advancements in technology and communications have allowed companies to outsource software programming, technology consulting, and application development activities to independent contractors. The Affordable Care Act has presented access to health insurance for individuals without corporate policies. And corporations have recognized the benefits of streamlining operations and reducing health care, employment taxes, and retirement costs by eliminating positions that can be easily outsourced to specialized freelance professionals.

Moreover, 1099 workers are clearly taking advantage of the increased access to contract engagements through social media and internet platforms; the increase in demand for freelance services; and the greater flexibility, independence, mobility, and freedom afforded by contract employment. In particular, the Millennial generation (aged 18 to 34), who grew up with the Internet, social networking, and a difficult job market, is embracing this less traditional working concept, accounting for an estimated 43% of all freelance workers (based on survey respondents).9 Notably, 60% of the freelancers that left the traditional workforce now earn more than they did with their prior jobs.10

Perhaps it is finally time to ditch the tie, trash the resume, and get stoked for the 1099 Economy?

Until the next Daily Pfennig® edition…

Mike Meyer
Vice President
EverBank World Markets, a division of EverBank