These jobs are mostly created by subcontracting companies and are associated with a 10 percent drop in wages.
Although unemployment in America rose to 10 percent during the financial crisis of 2007-2009, the labor market now seems to be faring better, with unemployment currently standing at just 5 percent. However, all is not well in this brave new world. Firstly, many unemployed people are not seeking work anymore, so they are no longer included in unemployment statistics. Moreover, the growth in the number of jobs in the United States between 2005 and 2015 is entirely due to the rise in precarious and non-traditional employment. These are the findings of a completely new working paper written by two of the greatest American economists: Larry Katz from Harvard and Alan Krueger from Princeton.
In the last 10 years, the number of precarious and unconventional jobs has grown rapidly. Between 2005 and 2015, the proportion of jobs in this category rose sharply from 10 percent to 16 percent in the United States, corresponding to an increase of more than 50 percent. What is meant by precarious or non-traditional employment? This term covers freelance and on-call workers, whose work comes from employment agencies and subcontracting firms.
We hear a lot about companies like Uber, who provide a platform for freelance workers. Some people claim that Uber and other similar companies offer greater flexibility to workers, whereas others feel that this type of work brings with it a new form of job insecurity. Despite Uber’s strong growth, this type of work only accounted for 0.5 percent of employment in the United States at the end of 2015. Thus, their rise only accounts for a very small proportion of the increase in insecure or non-traditional work in the United States.
In fact, it is mostly the subcontracting sector that has experienced strong growth; in 2015, this sector accounted for 3.1 percent of jobs, compared with 0.6 percent in 2005. Who works for these companies? Surprisingly, the more a worker is qualified, the more likely s/he is to be doing this type of work. Now, we know very little about these skilled workers: Are these jobs actually precarious and, therefore, undesirable? Or are we talking about a free choice made by these workers?
Conversely, research shows that the increase in subcontracting is damaging for unskilled workers, who are, in fact, paid less when working for an agency than they would be if they had been hired directly by the company. For example, Arindrajit Dube and Ethan Kaplan demonstrate that this drop in income happens equally as much in the maintenance and cleaning sector as in the security sector. The drop in earnings can be as much as 10 percent. In addition, these workers have no health insurance (which is private and optional in the United States).
In the United States, those companies that use subcontractors the most also tend to be those who pay their own employees best. This strategy allows them to focus on their core business while increasing their profits.
However, the growth in providing services to businesses, and the job insecurity that accompanies it, is not limited to the United States. Closer to home, Deborah Goldschmidt and Johannes F. Schmieder have shown that this phenomenon also exists in Germany. The surge in outsourcing seems to be a phenomenon which is common to developed countries. And everywhere, in Germany as in the United States, low-skilled employees have seen their income fall by 10 percent. Therefore, this phenomenon is a cause for concern.