The Economic Basis of the Independent Contractor/Employee Distinction
27 Pages Posted: 19 May 2020 Last revised: 16 Jun 2020
Date Written: April 22, 2020
In recent years, a controversy has erupted over the distinction between employees and independent contractors. Commentators have argued that in the modern “gig economy,” many people traditionally classified as independent contractors are as vulnerable as employees and should be granted the legal protections that employees alone normally enjoy. However, the distinction between the two categories remains inescapable, and the theoretical basis for it has not been identified. I argue that the distinction is derived from market structure. Employees are workers who, because they must make relationship-specific investments in a single firm, are subject to labor monopsony. Independent contractors do not make such relationship-specific investments, and hence normally operate in a competitive labor market. Employment and labor law may be explained as a method for protecting workers from labor monopsony; because independent contracts are not subject to labor monopsony, they do not require such protection.
Keywords: independent contractor, employee, monopsony, misclassification
JEL Classification: K21,K31
Suggested Citation: Suggested Citation