Old law vs. the new economy.

How New Deal-era regulations stifle flexible work arrangements

In August 1997, a certain Mr. T. Trahan of CSG Credit Service wanted to let his sales executives work out of their home offices. He was uncertain about his possible obligations under the Occupational Safety and Health Act, so he wrote to OSHA, the agency that administers the act.

The wheels of bureaucracy grind slowly: His query went unanswered for over two years, but he finally received a reply in November 1999. Those wheels also grind exceeding small, because the Occupational Safety and Health Administration finally said that, yes, a workplace is a workplace and the act applies even if it is in a home. The employer must diligently identify possible hazards to protect the employee.

OSHA's interpretive letter went on for six pages, covering such employee dangers as the possible overload of electrical circuits, the need for material safety data sheets covering hazardous chemicals, the applicability of its then-pending rule on ergonomics, and other such intricacies.

This assertion of OSHA authority went unnoticed until the next January, when a Washington Post story about it triggered a frenzy of media and congressional objections to over-regulation and invasion of the home. OSHA withdrew the letter within 24 hours, and within three weeks its head told a Senate committee that it did not hold employers responsible for home offices, did not expect employers to inspect these, would not itself inspect, and regretted the whole misunderstanding.

But that testimony clouded the reality that the agency did not retreat an inch from its view that the act does in fact apply to home offices, and that agency forbearance is a matter of choice, not law. OSHA could at any time reverse its stance, at a cost estimated by the Employment Policy Foundation, a Washington, D.C.-based think tank that leans toward the business side of employment issues, of at least $1,000 per home office for compliance with rules on clutter, lighting, furniture, exit signs, lead paint, and so on.

The OSHA telecommuting controversy was only the most publicized recent instance of the growing conflict between the possibilities of the information-age economy and the rust-caked body of labor laws and--equally important--mental attitudes built over the past century.

The business community assessed the outcome of the telecommuting encounter as an armistice, not a victory. Bobbie Kilberg, president of the Northern Virginia Technology Council (NVTC), told the same Senate committee that the agency's retreat allowed her organization to continue its pro-telecommuting policy "for the present time," but that for the long run the policy needs to be formalized by legislation, or at least rulemaking.

Kilberg noted that seven of NVTC's 17 employees telecommute at least one day per week, and that four of these are mothers with children under 14. She could have added that the NVTC is only one example of a significant trend. A Gallup poll last autumn found 8 million full-time telecommuters in the U.S.--a number up from zero a decade ago--out of a total workforce of 135 million. The number of part-time telecommuters is believed to be much higher.

In a year when the soccer mom was the most lusted-after political quarry in America, the significance of Kilberg's numbers could not have escaped the senators. Woe awaits the elected official who lets OSHA eliminate the flexibility that telecommuting offers to the professional classes.

What do women workers want?

While the telecommuting battle was going on, OSHA's analogue in the Department of Labor, the Employment Standards Administration, was fighting its own war against the new economy. ESA handles such issues as time-and-a-half overtime pay, which is required if hourly workers put in more than eight hours in a day or 40 hours in a week. It was asked how the calculation of time-and-a-half was affected by a worker's receipt of stock options. In February 1999, it answered with an interpretation saying that the value of the option had to be considered as part of the employee's base pay. Then it added an elaborate and absolutely incomprehensible guideline on calculating this value. As a result, a company would have had to be insane to even consider stock options for hourly workers ever again.

This, too, sat unnoticed for a time, then hit the press big at the end of 1999. As in the telecommuting case, the political system reacted strongly. But this time, ESA did not retreat. So in May 2000 Congress changed the law, by a unanimous vote in each house, so that stock options are not considered part of an hourly employee's basic pay.

Telecommuting and stock options have both become important issues because new social attitudes are emerging from the new economy. The stock option question reflects several beliefs--the idea that all should participate in the economic returns from the new economy, a blurring of historic dichotomies between labor and capital, and concepts of worker participation and the "we're all on the team" ethic.

The defense of telecommuting reflects a rising national appetite for flexible employment arrangements. The Employment Policy Foundation notes that 90 percent of employed Americans work under traditional arrangements (i.e., 40 hours a week, eight hours a day at the employer's workplace, or some regular part-time arrangement), but some 51 percent would like looser deals, such as working from home or dropping in and out of the labor force.

The desire for flexibility is especially pronounced among parents, and two-thirds of all mothers with children under 3 are now working (compared with 42 percent in 1980). Employers have been responding. While total work time required may remain rigid, more give is creeping into starting and ending times. In 1991, 15 percent of all full-time workers had flexible schedules; by 1997 (the most recent data available from the Bureau of Labor Statistics), 28 percent did.

Congress, ever ready to impose quotas in the name of whatever cause achieves sacred-cow status, has picked up telecommuting. It has decreed that federal agencies must allow telecommuting and that the Office of Personnel Management must ensure that at least 25 percent of the federal workforce is participating, starting immediately.

The increase in telecommuting and in flextime has fueled many stories about the growing openness of labor arrangements. But these two developments are not the tip of a new labor iceberg; they are the whole iceberg. In other areas, working arrangements are steadily becoming less rather than more flexible.

For example, one might expect that many young mothers who have moved into the labor force would prefer part-time to full-time work. In fact, while the absolute number of part-time workers has expanded, part-timers as a percentage of the work force have declined from 20 percent in 1982 to 16 percent today.

Nor is the Internet generating the host of independent contractors or temporary employees that was anticipated. Only 8.2 million workers are independent, and they are mostly what they have always been: management consultants, sales reps, real estate agents, carpenters, and truck drivers. No more than 156,000 independents work as computer geeks, and no tide of independents is discernible in other parts of the economy.

Agency-employed temps are also rare, supplying only 1.2 million workers. They are not particularly noticeable in high tech; only 1 percent (18,000) of all systems analysts and 2 percent (15,000) of programmers live in the temp world.

The increase in scheduling flexibility has also proved a limited benefit. It applies mostly to professional, managerial, and sales workers, 40 percent of whom can control their schedules. As one moves down any given hierarchy, flexibility grows more rare.

Logically, introducing flexibility into organizational structures and work schedules could not only accommodate the desires of soccer moms and dads, it could produce significant economic savings that would benefit firms and workers. Yet so far the response to the possibilities created by the information age has been notably tepid. Why?

Keeping the workers down

Conventional labor arrangements are largely dictated by the economic imperatives involved in making the most efficient use of a firm's infrastructure, such as the support staff, supervisory time and energy, information resources, and communications. These require centralized work sites and consistent hours of operation. They also require massive investments in buildings and equipment that are used a measly 40 hours a week, plus an expensive transportation infrastructure built to meet rush hour needs that also eats up billions of hours of human commuting time.

The rise of the Internet, among other communication technologies, offers huge opportunities to organize work in new ways. Space and equipment costs can be cut, travel time reduced, even public infrastructure investments re-configured. The potential gains in efficiency are dazzling.

But the centralized structures and fixed schedules of the modern workplace are dictated by something other than economic efficiency. They are compelled by federal and state government rules, and it is far from clear that these will permit the changes necessary to produce possible gains. In fact, to judge by the telecommuting and stock-options cases, it is clear that these rules will be modified only after bitter, inch-by-inch struggles.

The U.S. Department of Labor enforces over 180 different laws. The Equal Employment Opportunity Commission and the National Labor Relations Board administer regulatory empires of their own, and the 50 states add yet more regulatory layers. These laws encompass a huge array of subjects and purposes.

The first of the big federal acts was the Davis-Bacon Act of 1931, which required that federal construction projects pay "prevailing wages" so as to avoid cutthroat competition for scarce work during the Depression. Other federal laws initiated during the Depression era, or added since, cover wages and hours, protection of corporate whistleblowers, pensions, family and medical leave, occupational safety and health, disabilities, and many points in between.

It is a jerrybuilt structure, and much of it was enacted for dubious motives. Davis-Bacon was designed by its congressional sponsors to ensure that African Americans, who were not allowed into unions, got no share of Depression-era public spending.

Laws against home-based work are based partly on the truth that the practice can be used to avoid minimum wage laws. But they also provide employment to people who do not want to keep a regular schedule. The labor bureaucracy's hostility to such arrangements derives largely from the labor-union calculation that home workers are hard to organize. The Department of Labor has conducted a decades-long crusade against folks who want to supplement meager incomes by part-time knitting at home.

Much of the structure of labor law reflects the zanier thinking of the New Deal. One was the idea that the U.S. was a mature economy in the 1930s, and that available work must be rationed. Another was that the road to recovery lay through the creation of scarcity by reducing supply while raising prices. (John Maynard Keynes tried to talk Roosevelt out of this one; he failed.)

The structure remains as built, as if Rube Goldberg had designed it, however inconsistent with subsequent experience or modern life. One of its most important premises is that flexibility is bad. Labor policy assumes that employers have power and workers do not. Thus, workers should not be permitted to bargain over conditions of employment, except through unions, because the imbalance of power means that anything that might lead to abuse will lead to abuse.

Thus, if hourly workers are allowed to work 10 hours a day for four days instead of eight hours for five days, then employers will impose this schedule on some unwilling workers. This cannot be allowed. Thus, if employers and employees are allowed to agree that a worker will get comp time instead of overtime pay, then employers will force this on workers. This too must be forbidden.

The idea that labor markets might work like other markets, that workers might sort themselves out according to their own preferences among packages offered by different employers, is antithetical to the still-prevailing New Deal belief system.

Although unions have often been criticized for crafting unyielding work rules, legal standards actually impose greater rigidity on the workplace. Unions can be bought off, persuaded to relax a rule in a trade for money. Legal standards, on the other hand, are set in stone. If the Fair Labor Standards Act forbids a four-day, 10-hour-a-day week, then that's that. The employer can't offer more money for the flexibility, nor can an employee who desperately wants the new schedule offer to take less.

Even anti-discrimination and anti-harassment laws, which have goals with which all would concur, have become forces for rigidity. They are shot through with vagueness and uncertainty, and the multimillion-dollar damages that juries have awarded under these laws have put employers into a defensive posture. This means inflexibility. Because supervisor discretion is too easily painted as discrimination, everyone must be treated alike and everything must be documented. Flexible arrangements cannot be offered to some employees and not others, which makes employers reluctant to offer them at all.

The potential implosion of Social Security is reinforcing government's propensity to enforce rigidity. Any sensible current entrant into the work force would opt out. He would declare himself a free agent, ask that his employer's share of Social Security be paid to him in cash, and sock both it and his own share into an index fund. A $50,000 per year worker would save $7,650 in a year, which at 6 percent would be worth $61,200 in 36 years. Few expect the rate of return from Social Security to be as high.

The Internal Revenue Service seems, sensibly, to fear massive defections from the system, and is growing more imperious in its decisions restricting employers' use of free agents. Any effort toward flexibility is assumed to be motivated by a desire to evade Social Security tax obligations, and can be countenanced only if the deal passes an elaborate 20-point test. An employer who guesses wrong on the result will pay heavily.

The IRS' assault on flexibility is always justified by stem lectures on the need to protect the workers against exploitive employers, never in terms of protecting Social Security revenues against the rationality of the work force. In fact, the IRS policy injures workers both directly and indirectly. Not only is the worker's rate of return on his savings reduced, but employers have responded by imposing strict time limits on the tenure of independent contractors, decreeing that after a set period--usually three months--they must be cast adrift, regardless of their own desire or the state of the project on which they are working. Companies have also stopped hiring temps directly, forcing them to come in through temp agencies, which take a big chunk out of their pay. Both courses leave the workers worse off.

Employers who adopt flexible arrangements are also getting nicked by employees who repent of their bargain and want labor law to rewrite it. Last year, Microsoft agreed to pay almost $100 million to workers who had signed very clear contracts affirming their independent status. The IRS forced their reclassification as employees, and they then sued Microsoft on the theory that as employees they should have received stock purchase privileges in the 1980s.

AOL is being sued by volunteers who manned its chat rooms and performed other community services. Their original arrangement was very communitarian, and much like a gift economy; their recompense was in the accolades of the online community and in free connection time, which was valuable when AOL charged $6

an hour, but worth zilch when it instituted flat pricing of $19.95 per month.

These volunteers noticed that many company employees earned not just community approval but cash and stock options, which then became worth a fortune. They also noticed that the Fair Labor Standards Act does not allow volunteers in profit-making organizations. Like the Microsoft contractors, they want to be employees, retroactively.

Customer representatives at Amazon's Seattle facility are also reconsidering the glories of the new economy. They launched a unionization drive, an effort brought to a halt when the company cut the size of the facility and fired most of them.

Racial-bias litigation is increasing, with some minorities alleging that their underrepresentation in high-tech industries must be due to discrimination. They, too, want retroactive relief, particularly stock options, calculated at the peak values of the Nasdaq.

New economy vs. old law

The collision between the possibilities of the new economy and the institutionalized rigidity of old-style labor policy is creating an odd reversal. Businesses and their workers want to use the new technologies to take more account of employees' personal and family needs, expanding opportunities to fit work into a satisfying overall pattern. The partisans of the status quo are resisting, which means they persist in the dogma that employees must be treated as fungible factors of production and plugged into one-size-fits-all slots in the workplace.

There are several reasons behind this reactionary stubbornness. One is the perceived interests of the unions, which have dominated labor policy since the New Deal. Another is that labor law is administered by large bureaucracies, which must operate through rules. Because no bureaucratic structure can be made sophisticated and flexible enough to deal with all the complexities of real life, real life must be remolded to fit the needs of the structure. Note that OSHA took over two years to respond to a simple letter of inquiry about the legal status of home offices, as if the Internet and the world of telecommuting were supposed to freeze in place until OSHA staff got around to looking at their inboxes. A third factor is that the world of labor law administration is self-selected: People are drawn to jobs as labor law administrators because they embrace old concepts of class conflict. Combine all these factors and the result is an inevitable hostility to the new, fast-changing, and flexible world of work.

Can these forces win their war against the new economy? The ability of governments to enforce sclerosis should never be underestimated. Still, the potential economic and human gains from workplace flexibility are so immense that it is difficult to imagine either businesses or individual workers giving in without a major fight.

Consider the ongoing reconfiguration of industries at the core of the new economy, those in which the output can be translated into bits and moved anywhere in the world at the speed of light: movies, music, publishing, computer software, R&D of all kinds. These are the industries that can take greatest advantage of the economies attainable from dispersing their work forces and cutting back on their central offices.

The new configuration also greatly expands the talent base on which such a company can draw. Previously, a magazine published in Chicago had most of its staff there because interacting by mail was too slow. Staff was thus limited to those writers and editors living in Chicago or willing to move there.

Now, to say a magazine is published in a given city is increasingly meaningless. Writers and editors can be anywhere, and so can the printing plant, and none of these need be in the same place. This expansion of horizons also helps the writers. They can live in Chicago without limiting their options to that city, or they can live somewhere else and still work for the Chicago-based publication.

They have become much more mobile. Taking a job with a new publication no longer means pulling up stakes physically, so the risks of both hiring (for the magazine) and job change (for the writer) are greatly reduced. This in turn fosters innovation and experimentation. It also increases the possibility that a worker can put together two or three part-time gigs, which reduces further the costs and risks for all parties to the deal, thus creating yet more possibilities for innovative arrangements.

While new economy "bit-stream industries" offer the clearest examples of business evolution, similar changes are occurring throughout the old economy as well. Information is revolutionizing automobile manufacturing, oil drilling, and other activities once classified as "heavy industry." Computer programmers, automobile designers, lawyers, and other intellectual workers can be found all over the nation or the world, not gathered in a few business centers. Medicine is being revolutionized by bit streams in the form of pharmaceutical patents, and research facilities can be located anywhere. At a more prosaic level, American doctors now dictate post-operative notes that are transcribed by workers in India and returned to the U.S. by 7 the next morning. Even the medical advice itself can be dispensed over the Web. In the near future, your doctor may also be in India.

Are labor markets like other markets?

There is a fundamental question at the core of this controversy, one that has remained long unresolved: Should labor markets be treated like other markets, and workers allowed to sort themselves out according to their own preferences?

Americans have always been ambivalent in their answer. On the one hand, economists regard U.S. flexibility, as opposed to European-style labor protection, as a source of economic strength. On the other, much U.S. law is indeed premised on the view that labor markets are not like other markets, and that special protection is necessary.

Part of the philosophy of the free market is that everyone is both a producer and a consumer. From this perspective, labor is a factor of production, like capital goods and real estate; the dictates of economic efficiency are that workers will be pushed to their limits. They will be subjected to competition and paid only the value that other people place on their production, and that much only if no one else can produce more cheaply.

But when workers switch to their role as consumers, things change. They then get the benefits of the wealth produced by the system. This wealth is immense, precisely because the system culls out business inefficiency and constantly reorganizes to put resources--including workers--to their most productive uses. The theory is that everyone is both consumer and producer, both king and serf. Because you cannot select only half of the system, the trade-offs benefit everyone.

In practice, people are always squeamish about this philosophy. It is difficult to separate the "factor of production" from the human being doing the producing. Moreover, the producer/consumer trade-off does not work so well for those at the lower end of the labor system, because they get fewer benefits on the consumer side. No society, certainly not a democratic one, will ever treat labor as mechanistically as pure market theory suggests.

This hesitation is strongly reinforced by political pressures. Most of us believe that the free-market system, however sound in theory, needs some tweaking in our favor. We all know that we personally are underpaid and overworked, and deserve dispensation from the tougher parts of being a producer. If we manage to convince the political system, we can get the benefits of the free market while dodging our share of its unpleasantness. The situation is a natural for political log rolling, and in fact different groups of workers are treated quite differently, depending on their political clout. Davis-Bacon still stands as the prime example of politically motivated labor law.

A second reason for interfering with labor markets is the conviction that there is an imbalance of power between employer and employees. This argument cannot be dismissed out of hand. Memory is long, and in the company towns of a couple of generations ago, the imbalance was only too real.

Even today, labor markets remain "sticky." That is, workers' ties to communities inhibit their mobility, and information about alternative employers is often imperfect. Moreover, workers often have invested to create skills specific to a particular job, company, or industry, and they may not be able to get rewarded for these if they change jobs. Employers can and do use such stickiness to their own advantage.

These concerns about labor markets are intertwined--employer power derived from stickiness leads to a sense that intervention is necessary which leads to log rolling. So one of the most interesting dimensions of the new economy is that it forces us to rethink historic positions on these issues. The revolution is improving labor markets just as it is improving the market for goods, and the reasons for many of the existing interventions--however good or bad they were when adopted--need reexamination.

Working-class flexibility

Job markets are no longer limited by the classified pages of the local newspaper; they exist nationwide. If bit streams are involved, then physical relocation is unnecessary, whether for hourly workers or for writers, sales representatives, and management consultants. One can work as an Amazon customer rep from anywhere, not just Seattle. Even the new economy equivalent of the assembly line, a job such as data entry, can be performed anywhere in the world, as in the case of the Indian medical note transcribers.

Relocating also entails less psychic trauma than it once did. Moving on speculation is less necessary; the labor market in a new locale can be checked in advance. Information about living in the new community is far more plentiful and accessible. If training is needed, that too is more available than ever, thanks to the Internet.

Even political log rolling may become less resistant to reform. The expansion in the number and diversity of information channels is making the government more transparent. People can use the Internet to learn about such things as the low rate of return on their Social Security contributions, or the special tax breaks given to particular groups.

Recently, a proposed expansion in the regulation requiring banks to nose into the affairs of their customers generated 250,000 e-mails to the federal agencies involved. This campaign was triggered entirely by Internet word of mouth. In contrast, in pre-Internet days, it would have been impossible for word of the government's telecommuting and stock-options decisions to have spread so quickly or to have aroused such instant and massive opposition.

One possible result of these developments is that the traditional American ambivalence about labor markets may change, too. We may become increasingly willing to accept the bargain whereby people bear the burdens of the market as producers and take the benefits as consumers. But the fate of the Nasdaq over the past year has tempered the hype of 18 months ago, as well as the everyone-a-capitalist-king enthusiasm.

In any event, all that has happened so far is that the professional classes are expanding the flexibility of their working hours and are getting the right to work from home some of the time. The free agent universe of the visionaries is not coming to pass, and is resisted by the labor and tax bureaucracies. But then the war between old labor law and the new economy is only beginning.

James V. DeLong ([e-mail]) is a senior fellow in the Project on Technology & Innovation at the Competitive Enterprise Institute in Washington, D.C.

Contributing Editor James V. DeLong writes persuasively in this issue that outmoded labor regulations are hampering the shift to far more flexible workplaces for most Americans. (See "Old Law vs. the New Economy," page 44.) The 62-year-old DeLong has worked in a lot of different settings over the years: a law firm in Los Angeles, the precursor to the U.S. Office of Management and Budget, and the Federal Trade Commission, to name only a few. These days, he's a senior fellow in the D.C.-based Competitive Enterprise Institute's Project for Technology and Innovation. Having worked for many years as a freelance writer and policy analyst, DeLong also has a fully decked-out home office that he would like to use more often. "Ironically, I don't telecommute, though I would prefer to," he says.