Congress can boost job growth by repealing flawed employer standard

Congress can boost job growth by repealing flawed employer standard
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Congress has a surefire way to improve job growth: Repeal the new joint employer standard. Congress shouldn’t be in this position, as a principal rule of policymaking is to first do no harm. Unfortunately, the National Labor Relations Board (NLRB) violated this rule when it broadened the joint employer standard in a 2015 decision that failed to consider the totality of problems it would create, particularly for franchises. The good news is that some in Congress are already working to reverse the NLRB’s decision and permanently ensure it does not make the same mistake again.

Recently, a bipartisan group of members of the House of Representatives took an important step towards protecting millions of American workers from what is turning out to be a very damaging decision by the NLRB. Specifically, they introduced the Save Local Business Act. The legislation would reverse the NLRB ruling, which made it easier to hold one business responsible for the employment and pay practices of a separate company. The ruling is particularly harmful to a business model that has been among the most dependable sources of job creation in the economy: franchises.

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Why is the broadened joint employer standard so problematic for franchises? If a franchisor is more likely to be held responsible for a franchisee’s workers, the franchisor will simply be less likely to sell franchise licenses to independent business owners. This is a problem for the economy because job creation in franchises, at 3.4 percent annual growth, far outpaces the rest of the private sector’s 2.0 percent annual growth.

Recent research by the American Action Forum (AAF) details the problems the NLRB’s ruling presents for franchise workers. Its analysis found that if franchise employment growth were to slow to the non-franchise rate, it would mean a loss of 1.7 million jobs over the next decade. A new analysis looks at workforce trends in the hotel industry since the NLRB broadened the joint employer standard. More than one-third of the hotel industry’s workers are employed by franchises, and in the years leading up the NLRB’s decision hotel job growth lagged the rest of the economy. Consequently, the hotel industry is perhaps most vulnerable to the deleterious effects of the new joint employer standard.

While the evidence is preliminary, AAF found that the new standard may already be creating problems for the hotel industry. After the NLRB’s decision in 2015, growth in hotel employment growth stalled in 2016, and a decline in franchise job growth appears to be the primary culprit. In particular, in the years leading up to the NLRB’s decision, hotel employment grew at a 1.9 percent annual rate. In 2016, however, hotel jobs only grew 1.1 percent, a 0.8 percentage point drop. Moreover, this decline was driven by plummeting hotel franchise job growth, which decreased by 1.4 percentage points from 1.8 percent before the new standard to just 0.4 percent afterwards.

The new standard may also be harming hotel worker wages and hours. In the year following the NLRB’s decision, inflation-adjusted hourly wages in the hotel industry stopped growing completely, bad news for a sector where wages grew at a tepid 1.1 percent annual rate before the NLRB’s decision. In addition, work hours went from growing 0.5 percent annually to declining by 0.3 percent. Between the lower job growth, the complete lack of wage growth, the reduction in work hours, the sum of all pay earned by all workers in the hotel industry went from rising 5.7 percent annually before the NLRB’s decision to declining by 1.2 percent after its decision.

While the entire private sector also experienced slower job and wage growth, the negative trends were far more pronounced in the hotel industry. This suggests that broader economic forces are not solely responsible for the experiences in the hotel industry and that the additional burden of the new joint employer standard is taking its toll.

One would hope that the NLRB based its decision on the ultimate goal of increasing worker earnings. Nevertheless, the policy is clearly failing. Since the decision, hotel employment has slowed, wages have stagnated, and total earnings have contracted. Should the rule continue, the negative effects will almost certainly spread to other industries that rely on franchises. And as franchises are one of the most dependable job creators in the United States, reversing the decision should be a priority for Congress and the administration.

Ben Gitis is director of labor market policy at the American Action Forum.