AB 5 is Taking Away Opportunities for Communities of Color & Low-Income Communities

Editor’s Note:  On Monday, Dr. Wayne Winegarden, PRI senior fellow in Business and Economics, was invited to testify before the California advisory committee to the U.S. Commission on Civil Rights on the civil rights implications of California’s controversial AB 5.  Winegarden’s comments as written are presented below:

Madam/Mister Chairperson, members of the Advisory Committee, thank you for the opportunity to participate in this important hearing on the civil rights implications of AB5. My name is Wayne Winegarden, and I am a Sr. Fellow in Business and Economics at the Pacific Research Institute. The mission of PRI is to champion freedom, opportunity, and personal responsibility for all individuals by advancing free-market policy solutions.

Understanding the impact from AB5 on California’s economy, entrepreneurship, low-income communities, and communities of color has been an important research priority for us. Our analyses have found that AB5 will impose net negative impacts on the economy and reduce entrepreneurial opportunities, with a particularly negative impact on low-income communities and communities of color.

Based on our analyses, I would like to emphasize three themes in my comments today:

  • The traditional notion that entrepreneurship is an important pathway for climbing the economic ladder continues to hold today, particularly for communities of color.
  • The development of the gig economy has created new valuable options that empowers individuals to engage in entrepreneurial ventures.
  • AB 5 is disconcerting because it creates barriers that obstruct the gig economy and, consequently, reduces the vibrancy of the entrepreneurial sector.

One way to demonstrate why entrepreneurship is an important pathway for climbing the economic ladder is to examine the wealth gap.

Starting with the wealth gap for different ethnicities overall, data collected by the Federal Reserve show that the net worth of White, non-Hispanic households in 2019 was $189,100, which was nearly eight-times higher than the net worth of Black, non-Hispanic households, which was $24,100, and more than five-times higher than the net worth of Hispanic households, which was $36,050.

Research by the Congressional Black Caucus found that being a business owner materially improves this situation. First, African American business owners have a net worth that is 12-times higher than the net worth of African American nonbusiness owners.

Second, being a community of color business owner materially reduces the wealth gap. Comparing African American business owners to white business owners to ensure an apples-to-apples comparison, the median wealth of white entrepreneurs is three-times higher than the median wealth of African American entrepreneurs. While the gap is still troubling, it demonstrates that entrepreneurship significantly improves the wealth gap outcomes.

These results exemplify why a vibrant entrepreneurial sector is so important for improving the economic outcomes for communities of color. The gig economy is important in this process because these platforms help empower entrepreneurs.

Through the gig economy, entrepreneurial workers are empowered to earn supplemental income that can smooth unstable earnings from a traditional job. It also allows full-time entrepreneurs to set their time, work schedule, and bet on their own talents to earn a living.

Importantly, most gig workers are satisfied with their current work arrangements. According to surveys, the majority of gig workers are working in the gig economy by choice and more than 75% of gig workers are satisfied with their current work arrangements. It is also noteworthy that around three-quarters of gig workers have health insurance according to a 2021 study.

When recognizing the broad benefits from the gig economy on entrepreneurship, it is also important to recognize that the gig economy is much broader than just Uber and Lyft. The gig economy creates opportunities for handyman services (Task Rabbit), care services (care.com), web programmers (Fiverr and Tongal), and many other professions as well.

These findings matter for communities of color because research by the Pew Research Center have found that Hispanic and African Americans are more likely than White Americans to have earned money through the gig economy.

Putting all of these results together indicate that the gig economy creates entrepreneurial opportunities that communities of color value. And these results are consistent with the election results of Prop. 22 that upheld the independent status of gig workers driving for Uber, Lyft, and other driving gigs. A report by the LA Times found that “lower income areas including plurality-black neighborhoods” supported Prop 22.

Traditional entrepreneurs also benefit from the gig economy by being able to purchase services from gig economy entrepreneurs. Put differently, the gig economy provides demand-side benefits to entrepreneurs in addition to the supply-side benefits.

One of the consistent problems facing small businesses according to the National Federation of Independent Businesses (NFIB) is finding the right people (what the survey refers to as “access to the quality of labor”). The gig economy offers these businesses greater access to the people with the skills they need on an “as needed” basis. Access to the talent small businesses need at the time it is needed helps small businesses more effectively manage their operations and costs.

Since the gig economy creates large benefits for entrepreneurs, and particularly for entrepreneurs from communities of color, obstructions that make it more difficult or more costly to engage in gig economy transactions will have net negative impacts on entrepreneurs. AB5 is one such obstruction.

AB5 harms entrepreneurship in two inter-related ways.

First, forcing companies to reclassify gig workers as employees causes many current gig workers to lose work opportunities making these people financially worse off. However, even if every impacted gig worker were reclassified as an employee, AB5 would still make gig workers worse off. Consider the following survey results:

  • 56% of gig workers feel more secure than they would in traditional jobs
  • 51% of gig workers would not go back to traditional work for any amount of money, and
  • 84% of freelancers are living their preferred lifestyle compared to just 54% of those working in traditional jobs.

Consequently, AB5 reduces the available opportunities for workers who want to use gig economy platforms to engage in entrepreneurial ventures.

Second, AB5 imposes an additional regulatory cost on businesses including small businesses. High regulatory costs are already a large burden on companies in the Golden State that put small businesses at competitive disadvantages relative to their larger competitors. Adding to these burdens makes it more difficult for existing small businesses to compete to the detriment of entrepreneurship.

A study by the National Association of Manufacturers, while based on national trends, provides insights on how large regulatory costs are already. According to the latest iteration of their study, regulatory costs add $11,724 per employee in compliance costs for small businesses. The costs of tax compliance add an additional $4,300 per employee.

Putting these costs together, a small business that employs 5 people already spends $80,000 a year in tax and regulatory compliance costs. To put these costs in perspective, eliminating these costs enables small businesses to give every employee a $16,000 raise without reducing the profits of the company.

Not only are the regulatory costs in California larger than the national average, AB5 has significantly increased these burdens. Some estimates forecast that complying with AB5 can increase costs by 20% to 30% for some businesses.

Due to the increase in regulatory costs caused by AB5, small businesses are at an even larger competitive disadvantage relative to larger companies. The result is to further disadvantage small businesses and entrepreneurs.

AB5 is an anti-entrepreneurial policy that reduces opportunity in California. These impacts are particularly large for low-income entrepreneurs and entrepreneurs from communities of color. These adverse outcomes indicate that to better promote economic opportunities for communities of color, AB5 should be repealed.

Thank you for the opportunity to provide these comments.

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