California's Governor Jerry Brown signed a law last week threatening punishment for handymen who advertise their services for jobs larger than $500, and giving state enforcers free access to job sites to check on contractors' licenses. As Steven Greenhut noted for Reason, a big push for the law, which prescribes criminal time for unlicensed work that previously drew administrative penalties, came from the state's contracting industry. In a state that continuously ranks toward the bottom of assessments of economic (and social) freedom, contractors seem dead-set on penalizing competitors who flee into the shadow economy to escape burdensome taxes and regulations. That's a lot of competitors, considering that one in six of the state's construction workers labors "informally."
Just weeks ago, Economic Roundtable released a report noting that "Informal employment in Californian construction has increased by 400 percent since 1972." Formal employment—that is, work subject to the state's growing web of red tape and taxes—has increased too. But the biggest growth has been in self-employment, "independent contractors" who aren't, and outright off-the-books work.
A new report by the Economic Roundtable, a public benefit research organization, released on Labor Day, found that 143,900 construction workers in California fell into the informal economy in 2011. This was comprised of 104,100 construction workers who were not reported by their employers and 39,800 who were misclassified as independent contractors. Construction is a $152 billion industry in the Golden State, employing 895,000 construction workers, of whom one out of six has sunk into the informal economy. A quarter of employees in the specialty trades (including drywall and flooring) were informal.
The report is full of hand-wringing over lost taxes and those poor mistreated workers sweating through the day with low pay and no benefits. Don't knock yourself out looking for any acknowledgment that many of the jobs might not exist at all if the work was done by the rules.
In its 2014 rankings of best and worst states for business, Chief Executive magazine bluntly announced, "California is the worst state for business for the tenth year in a row." The state gets one star out of five for taxes and regulation. One executive is quoted saying, "California could hardly do more to discourage business if that was the goal. The regulatory, tax and political environment are crushing."
Californians should probably be glad that they still have so many informal jobs, even if that means regulators and tax collectors get their feelings hurt. Travis H. Brown, author of How Money Walks, points to IRS figures indicating that California was a net loser of $46.32 billion in adjusted gross income from 1992-2011 that fled to other states.
But instead of lobbying for relief, the state contracting industry successfully persuaded politicians to subject their businesses to even more onerous rules and enforcement, just to punish competitors who have the nerve to try to survive in an inhospitable environment.