Surge in Number of Contractors Helps Explain Why Recovery Adds Few Jobs

Ken Gaebler can help explain how the U.S. economy can be growing so briskly without adding significant numbers of new jobs.

When Gaebler's three-year-old marketing firm needs a computer programmer, a speechwriter, a Web designer or just about any other work done, Gaebler doesn't take out a help-wanted ad. He puts the project out to bid on the Internet.

He recently hired a man in Ukraine to design a computer system to monitor sales results. Gaebler paid him $118, much less than the $1,000 he figures he would have paid a freelance American programmer. Gaebler paid by credit card and earned frequent flier miles on the transaction.

Gaebler's Chicago firm has grown to nearly $1 million in sales with only three full-time, traditional employees.

"So many talented people that I worked with in the past are available for freelance work," Gaebler said. "These are people who used to make $150,000 per year and now they are freelancing and pulling in $60,000 to $70,000 while they wait for the economy to turn around."

It may be that the economy has already turned around and that Gaebler's personnel policies are among those that will help define this expansion: an era when the creation of permanent, full-time jobs will be tamped down by the global availability of work-for-hire independent contractors.

More than two years into the recovery from the last recession, coming off a quarter with sizzling 8.2 percent growth in the gross domestic product, the U.S. economy has created only 278,000 new jobs in the past five months -- leaving the nation's total number of payroll jobs 776,000 lower than when the recovery began.

"It's a new kind of workforce," said Paul Villella, chief executive of HireStrategy, a Reston-based recruiting firm. About 64 percent of the people his firm found work for last year accepted jobs as independent contractors, up from 28 percent in 2000. He described the job seekers as mostly accountants and software engineers.

While economists agree there is more self-employment, they disagree about whether this is a temporary adjustment that will soon give way to more robust growth in traditional jobs, or a lasting change in the nature of work and the relationship between employer and worker. The answer to that question matters greatly to presidential candidates vying for office during a "jobless recovery," as well as to Federal Reserve officials who must decide how long to leave interest rates at a 45-year low.

Fed policymakers have made clear in recent public comments that they will leave their target for a key short-term rate at 1 percent when they meet today and Wednesday, and probably for some time after that, in large part because of the continuing softness of the labor market. If and when the job market strengthens, Fed officials will have to decide how to start raising rates to prevent inflation from rising to undesirable levels.

Making these decisions is tricky, particularly in a changing economy. "Assessing the amount of slack in the labor market is very difficult and ultimately a matter of judgment," Fed Governor Ben S. Bernanke, one of the 19 members of the central bank's policymaking committee, said in a recent speech.

Many economists believe the government's official job statistics are having difficulty measuring changes in the employment picture with precision. For example, jobs being created by small businesses can take longer to be recognized in the official tallies compiled from the Labor Department's survey of about 400,000 employers.

That survey also does not capture the increase since the recession in self-employment, contract labor arrangements and off-the-books labor, including work by illegal immigrants, according to a recent study of federal and local employment data by the Center for Labor and Market Studies at Northeastern University.

The number of people who identify themselves to census takers as non-farm, self-employed workers rose to 9.5 million in December, seasonally adjusted, up from 9.2 million a year earlier and up from 8.9 million when the recession ended, according to the Labor Department. The category includes all sorts of workers -- real estate agents, consultants, programmers or graphic artists -- as long as they are not also employed by a business, government or nonprofit organization.

SurePayroll, a Chicago firm that provides payroll services to small businesses, says more workers are reporting their earnings by tax form 1099, which is submitted for freelance work, rather than by W-2 form, which is submitted for traditional employees. Michael Alter, SurePayroll's president, said the number of 1099 employees the company paid for its clients rose to 4.7 percent last year, from 4.2 percent the year before. He described his client base as about 10,000 small businesses.

"We definitely see aspects of a recovery," Alter said. "The number of people we're paying is growing, but more of them are contractors."

Alter said his company is relying more on contractors as well. The four-year-old firm has 70 employees, but no one handling marketing, public relations, sales, legal issues or business development. Alter contracts out all that work, he said, so he can "pay as I go."

Although this trend may be happening at the fringe of the economy, it explains at least a slice of how the jobless recovery is continuing. And some economists believe it will continue to grow.

"It's gone on way too long to be temporary," said John E. Silvia, chief economist of the fixed-income division of Wachovia Securities. "We have to treat it as a realistic transformation of the economy."

While self-employment is great for workers who enjoy the freedom and flexibility, others would prefer the security and employer-provided benefits of a traditional job. The data provide no information on how much self-employment is voluntary.

Electrical engineer Dale DiBernardo, 43, of Oviedo, Fla., said he was happy to double his pay by joining Gibson Audio as an independent contractor. He said the idea of permanence in the workplace was an illusion, and he hopes to prosper by maintaining greater control of his career prospects.

"I've lost total trust in the management of companies in controlling my future," said DiBernardo, who worked in the past as an employee of Boeing Co. and Jensen Audio. "The last thing I want to do is move to D.C. or Washington state or whatever and be laid off if the product doesn't take off. A lot of people are like me."

Others are more anxious. Eric Madden, 34, a Web page designer who lives in Alexandria, worked as an independent contractor for four months last year and said the "loss of security" was difficult to endure. He took a permanent job as soon as he could.

"There's a craziness all the time where you're wondering, 'Where will I be two months from now?,' " Madden said. "That instability wears down on people. I've noticed some people get ill from worrying all the time."

And not everyone can make the transition. John Mahoney, 55, of Battle Creek, Mich., lost his job making car stereo equipment in December 2002 and has been unemployed for 13 months, but doesn't think he would make a good businessman.

"I've always worked for someone else," he said. "I've never had the gumption to start a business. I don't even know where I'd start, to be honest with you."

Self-employment in the current economy favors some classes of workers over others, said Wachovia's Silvia. Those who have an information product to sell -- such as a writer, consultant, graphic artist, software designer or real estate agent -- would have an easier time setting up shop independently than a former textile factory worker.

Self-employment "works well for some people, but a production worker doesn't have that option," Silvia said.

Economists generally believe that sometime soon demand will rise strongly enough, for long enough, that employers will find they have to hire significant numbers of workers in traditional payroll jobs. They will have enough business to justify the overhead and benefits costs, and will have to compete for good employees in a tighter job market. And over time, more new jobs will come from innovative new technologies and industries we can't even imagine now.

Federal Reserve Chairman Alan Greenspan said in a speech yesterday that we can "be confident that new jobs will replace old ones as they always have, but not without a high degree of pain for those caught in the job-losing segment of America's massive job-turnover process."

But independent contractors and other nontraditional employment arrangements will continue to grow as well, Gaebler said. "It's just the tip of the iceberg now, but this is definitely going to be permanent."

Copyright © 2004. The Washington Post.