325 January 30, 1984 WHY NOT INTRODUCTION LET AMERICANS: WORK AT HOME In hundreds of homes, scattered throughout the towns of Vermont, individuals have been earning extra money by knitting ski caps and sweaters for sale in nearby stores and ski resorts.

These home crafts have been particularly attractive to the many women who cannot leave the home because of their homemaking and childrearing responsibilities. It is also important to many of the elderly, who turn to homework as a means of supple menting their retirement incomes. This source of income became available to all Americans in 1981 when Secretary of Labor Raymond Donovan concluded that Americans should have the right to work at home.

He removed a Department of Labor regulation that prohibited workers in the knitted outerwear industry from working in their homes.

Donovan's action was overturned last November, however, when the United States Court of Appeals for the District of Columbia ruled that he improperly had removed the restriction . This de cision was a blow to many Americans because it restricts the rights of citizens to engage in "industrial homework" during dif ficult economic times, when secondary sources of income are often essential. It was also a blow to the vast potential f or Americans to work in their homes at computer terminals the Court probably has impeded the U.S. economy's march into the 21st century and towards the decentralized workplace.

The Court's finding was based on a 1943 regulation promul gated under the Fair Labor Standards Act of.193'8, forbidding Americans from doing work at home in seven industries: knitted outerwear, women's garments, embroidery, handkerchief manufac turing, jewelry manufacturing, button and buckle manufacturing and gloves and mittens. Th e only exceptions are for individuals who are unable to leave the home because of a physical or mental impairment, those who are caring for an invalid in the home, and those who can establish that they are independent contractors By its decision, 2 The onl y beneficiaries of the Court's ruling are the en- trenched labor unions, which want to restrict the economic oppor- tunities of those who are not its members. This makes the ruling particularly disturbing It also is troubling because of the implication tha t reasonable rule changes can be blocked by the courts In this regard, economist Thomas Sowell's observation about the judicial branch's tendency to supplant the executive and legislative branches' role in the decisionmaking process is particularly relevan t It is hard to imagine why the writers of the Constitution would have set up a Congress or a President as decorative institutions if they thought there would be nothing for them to do in meeting the evolving needs of the nation."l The ruling blocking the S ecretary's action now means that the Administration must take further court action, perhaps even an appeal to the Supreme Court, if it wants to open new employ- ment opportunities and protect the basic rights of its citizens to engage in free exchange. It is important, moreover, that the Administration send a signal to the business community that such restrictions will not be imposed on other industries, such as the rapidly emerging telecommunications field consider less comprehensive rules changes to mini m ize the adverse impact of the regulations. homemakers with small children or individuals living in rural areas, where factory employment may not be feasible. legislative changes to achieve these same goals should be con- sidered. Senator Orrin Hatch R-UT f or instance, has introduced legislation S. 2145) to ease the barriers to homework, and hear- ings on the homework issue are scheduled for February 9th, before the Labor Subcommittee of the Senate Labor and Human Resources Committee If this effort is unsuc c essful, the Administration should These actions may include exempting Meanwhile The present restrictions are an anachronism, dating from a period when there was no high-technology and relatively few women were in the labor force. The situation today is ve ry different, and the law dealing with homework should be amended accordingly.

BACKGROUND The current debate surrounding homework began in 1979, when the Labor Department's Boston office took action against CB Sports of Bennington, Vermont, for allegedly v iolating the home- work regulation when it purchased ski hats from women who had produced them in their homes. The company claimed that the knitters preferred working at home and that they were independent contractors, not employees of the firm Thomas Sow e ll, Knowledge and Decisions (New York p. 294 Basic Books, Inc 1980 3 After examining the details of this controversial case, Labor Secretary Donovan proposed the abolition of all homework restrictions. Opposition from organized labor, however, led him to r everse this decision for all but the knitted outerwear indus try But even this concession failed to satisfy the International Ladies' Garment Workers' Union. It joined with some unionized manufacturers to file suit in federal court to overturn the regu- l ation.

Among the key issues in the case was whether or not the knitters are employees of a company or independent contractors and therefore free to knit ski sweaters and hats in their homes. The Court's primary concern was that it would be difficult to enf orce the minimum wage, overtime compensation and child labor force provisions of the Fair Labor Standards Act for such home- workers. The Court acknowledged the union's concern that the payment to homeworkers of wages below the minimum set by law would pu t employers complying with the Act at a competitive disadvantage, and would adversely affect the wages of all em= ployees in the industry.

The Labor Department replied that maintaining restrictions on homework within the knitted outerwear industry would ha ve a negative impact on employment in the industry. knitters themselves argued that they wanted the flexibility associated with working in their own homes and setting their own hours Moreover, the THE CASE AGAINST THE RESTRICTIONS The Court of Appeals in W ashington rescinded'secretary arbitrary and capricious I dividual freedom and seriously misunderstands the basic laws of economics. The decision is likely to have a devastating impact on the many Americans who prefer to work at home. stands, or is not sup e rseded by a change in the law, it will shut down many successful home-based businesses. serious blow to thousands of women seeking financial independence Donovan's decision to lift homework restrictions, calling it I Yet its own ruling disregards in If th e ruling This would be a Independent Contractors The primary issue in cases such as this is whether the home- workers are employees of a firm or independent contractors. Tra- ditionally, indep.endent contractors have been considered those who provide their own place of employment, set their own hours, supply their own equipment, supervise their own work, and are under either a verbal or written contract. usually do not receive from their clients unemployment insurance Independent contractors Denerics a comp a ny normally proviaes 'to ixs employees 4 In the major homework cases that have come to court, the individuals forbidden from working at home had supplied their own sewing machines and completed the work without any outside super- vision. Contracts specifi c ally stated that the women were not employees and were responsible for their own time and equipment. Moreover, the homeworkers also contracted their services to other businesses and individuals. The women were paid a fixed price for each piece and no dedu ctions were withheld because the Internal Revenue Service considered them to be independent contractors.

Employment Effects In its opinion, the Court noted that The employment 'benefit' of the recission might simply be a shift in employment from factories to homes, with no net increase in employment oppor- tunities.'I2 The facts, however, argue just the opposite. Rather than having an adverse effect on employment, as the Court and the unions allege, rescinding the restrictions on homework would generate th o usands of new employment opportunities. reason is that homework lowers overhead costs in an industry by allowing individuals to work in their homes, instead of in a costly factory. price for the final product, stimulating a greater demand for the products and raising the number of workers needed. Prohibiting homework, by contrast, forces firms to invest relatively more money in plant and equipment and less on labor than they other- wise would; this costs jobs. If firms can no longer operate with the optima l mix of production factor inputs, efficiency declines, costs rise and employment falls.

The underlying problem with the Court's reasoning is that the judges based their economic theory on a static model rather than a. dynamic one, and thus ignored economi c feedback effects within both.the affected industry and the economy as a whole The main This reduction in costs is reflected in a lower Unless the prohibitions on homework are rescinded, the adverse impact on employment will be exacerbated in the future. It has been estimated that by 1990 as many as 15 million jobs could be performed at home.3 The University of Southern Cali- fornia's Center for Future Research, for instance, projects that in ten years' time there could be 5 million Americans working at c o mputer terminals in their own homes at tasks ranging from data processing to ac~ounting This development could be an enormous boon to females heading households, to the handicapped, and to the many other Americans in some way restricted in movement See th e decision in International Ladies' Garment Workers' Union, et al.

Columbia Circuit, November 29, 1983. al, U.S. Court of Appeals for the District of v. Ravmond J. Donovan. et The Washington Post Magazine, ~December 26, 1982.

See Marguerite Zientara Telecomuting Banned by Service Union Board,"

Computerworld, July 11 1983, p. 7. 5 Unfortunately, unions already are taking steps to curb this. The Service Employees International Union, representing about 780,000 chiefly clerical and health workers, has passe d a ban preventing its members from doing computer homework. action is taken to guarantee the freedom of homeworkers telecom- muting may be stillborn. There is no industry lobby as yet to plead the other side of the case. And firms will not undertake the l arge-scale capital investment needed for this type of work arrangement to develop without some assurance that the government will not step in, under pressure from the unions, and change the rules in the middle of the game Unless Labor Opposition While org a nized labor claims that allowing homework would make it difficult to enforce the Fair Labor Standards Act, their real concern seems to stem more from a desire to protect their members from competition. Unions lobby for such restrictions because the rules increase the costs of nonunion competitors. This raises the demand for union labor and pushes up wage rates. The rules also allow the unions to exercise their strike threat more forcefully, since there are fewer competitors to threaten their jobs.

Homework and the Minimum Wage Union leaders claim that if women were allowed to work at home in these seven craft industries, they would be paid below the minimum wage. Ifwomen need protection to ensure they get paid basic minimum wages for hours worked, includin g overtime That's the basis for the regulation. If E According to Rudy Oswald of the AFL-CIO According to the Department of Labor hearings, however, there is no evidence that such protection is necessary today.6 But even if it were, wage rates below the st a tutory minimum would not be as harmful as the unions insist A basic principle of economics is that the wage rate equals the marginal productivity of labor. When a minimum wage.is established at a level above that market level, employment opportunities dis a ppear for the least productive workers, because their services are priced out of the market. The minimum wage alters the relative prices of labor and other inputs by making low-skilled labor relatively more expensive, therefore inducing the substitution f o r low- skilled labor of other inputs, such as machines and more pro- ductive labor. This artificial and inefficient mix of resources leads to increased production costs, reducing output and lowering the total demand for labor See Glenn Emery Women seek to stop U.S. from banning jobs sewing at home The Washington Times, February 23, 1983.

The hearings were held in January and February of 1981. 6 Thus, the alternative for those homeworkers making less than the minimum wage is likely to be no employment at al l. workers are not productive enough to find a job in a factory, or live in an area without factories, or have family responsibilities that preclude them from leaving the home, then homework restric- tions mean a reduced family income and possibility of f a lling into the welfare trap If the Homework restrictions can also prevent some women from obtaining the skills necessary to command higher wages. many women doin9 homework initially may not be productive enough to earn the minimum wage, they could acquire the skills needed to raise their incomes In December 1981, for instance, a Green Bay television station charged that some Laotian women supplying clothing to the Silent Woman, Ltd company appeared to make less than the minimum wage. The owner of the compa n y pointed out, however, that since the women could not speak English, there were difficulties involved in training them to operate sewing machines. Unfortunately for the Laotians, the publicity forced the firm to cancel its contract with the women. Since f ully trained sewers normally command far more than the minimum wage, the action meant that the newly arrived immigrants could not receive the training necessary to become self-sufficient. Although the current re= strictions on homework have been rationali z ed by the argument that they protect vulnerable citizens, the reality is that they do just the opposite-by denying them economic opportunity and upward mobility While ENFORCEMENT The Appeals Court's ruling against homework also was based in part on the di f ficulty in enforcing industry conditions on homeworkers. It noted problems in identifying workers and obtain- ing data on the hours worked and the effective wage rate paid. Despite these difficulties, however, it would be improper for the government to ba n homework simply because some workers may violate the provisions of the Fair Labor Standards Act. Doing so punishes all workers for the infractions of a few. should.be on the government to show significant violation of the Act. Moreover, illegal homeworke rs are hardly "protected" by a ban, since they are in no position to go to the Department of Labor to submit a complaint.

Fringe Benefits Union supporters of the homework restrictions sometimes allege that "the people who are doing the homework don't have any benefits, vacation, job security and so on, and are directly substituting for people who would have those more decent working conditions were they employed directly by an employers.117 I The burden of proof 7 See Zientara, op. cit 7 This reasoning is f lawed. In the first place, defining "decenti1 working conditions involves a subjective judgment. Many would consider their home to be a far more decent workplace than. a factory. Moreover, independent contractors do not have to ac- cept the standardized w o rk and compensation package typically offered in unionized factory employment-where pay scales are usually based on seniority rather than productivity. Instead, homeworkers receive the full monetary value of their output, allowing them to purchase private ly the package of benefits they desire.

There are other advantages of working.at home: 'lower travel flexible work schedules. Homework also allows women who cannot i work full-time to earn extra income while at home.

Even if a homeworker received a lower wage than a factory worker, therefore, the %et1! wage (deducting taxes and work- related expenses) may actually be higher for the homeworker. And even if a pay differential still existed, the congenial sur- roundings of a home could be sufficient to overc o me this dif- ference. For homeworkers, in other words, the "compensating differential" associated with working at home may be large enough to make higher paid factory employment less desirable and child care expenses, additional time with one's children, a nd Special Circumstances Allowing women to work at home is particularly important for those with small children. Over the last several decades, the female labor force participation rates have risen dramatically. The percentage of mothers with children und e r age 18 who are in the labor force has increased from 40 percent in 1970 to almost 60 percent in 1983--and the rate for married women with children under age 6 increased from 30 percent to 50 percent.8 two-thirds of these mothers work full time. economis t Mary Rowe The future child-care issue for children of this age may not be availability of care but rather accessibility and affordability lr9 alleviate this problem considerably by enabling mothers to work, yet take care of their children without incurri ng enormous costs. Caring for a child, particularly of preschool age, can be as much of a problem to women trying to find employment as caring for an elderly family member or an invalid-yet the law allows an exemption only for the latter groups.

In additio n, factory employment may not even be a practical option for Americans living in rural areas. employment opportunities and lack of adequate transportation may About According to MIT Removing restrictions on homework could The scarcity of Sheila B. Kammerm an The Child-Care Debate: Working Mothers vs. America Working Woman, November 1983, p. 132.

Ibid 8 pose serious problems. For many, homework is an ideal solution; the only problem is that it is now forbidden by Washington failed, in his decision to conside r alternatives to complete recission of the existing restrictions, such as providing addi- tional exemptions for those with child care obligations, or distinguishing between rural and urban areas. would be a step in the right direction, but groups not exe m pted would still face serious problems.1 The Appeals Court did note that Labor Secretary Donovan These modifications Voluntary Exchanqe Union leaders often call homework inhumane and oppressive. They claim that it putatively "exploits1' individuals workin g at home. What this ignores is that the contract between the home- worker and the company is voluntary and is made by adults. Homeworkers make such a contract because they obviously prefer working at home to working in a factory. They do so, apparently, b e cause they want the benefits from working at home. Eliminating the homework option would deny some workers the opportunity for training and self-sufficiency. Moreover, individuals now in restricted industries have the choice of joining a union and taking a factory job--unless unions restrict entry into such employment, in which case it is exploitation on the union side.

Although unions and government officials often invoke the I'public goodnf when justifying restrictions in such cases, they do not weigh the social benefits against all of the costs.

In particular, no account is taken of the losses suffered by those affected by "protective" rules the homeworkers unable to work and the companies prohibited from purchasing these products at the least cost. not hing more than a transfer of wealth from one segment of the population to another achieved by the government violating one of America's founding principles-freedom of contract A government restriction against homework is Judicial Activism In its ruling, t h e Court of Appeals did not find that the' homeworkers today were in violation of the Fair Labor Standards Act. It simply said that Secretary Donovan, in issuing new rules, had not used "reasoned decisionmaking in studying the options available short of co m plete recission of the homework ban. If the Court's ruling stands it means that the Administra- tion will have to obtain congressional approval before altering rules within one of its own agencies. The homework statutes, however, are not congressionally a p proved legislation but the Department of Labor's own restrictions. An analysis by the lo In fact, the exempted groups would probably have even less recourse than before because they would have to compete not only with unionized factory workers, but the ho m eworkers as well. equitable to exempt all groups.' It would therefore probably be more 9 Center on National Labor Policy, a legal foundation, points out that The effect of his decision is to create a de facto reduc- tion in the capacity of agency official s to make regulatory changes without the supervision of the entire Congress.1111 And if one Administration cannot reverse the regulations of another, then the power to promulgate regulations invites serkous abuse.

Legislation The problems arising from the homework restrictions stem from the fact that the 1938 Fair Labor Standards Act is out of date Two important recent trends make the restrictions against homework out of step with the times. of the female labor force participation rate indicates a growing d esire for women to earn additional income. This can be frus- trated by their inability to find adequate child care. Second, the advent of the home computer means many jobs can be done at home. Unless businesses see a strong commitment by the nation's lead e rs to protect homeworkers, however, they may be unwilling to risk spending their own money to promote this development S. 2145 The Freedom of Workplace Act." The bill would repeal the restrictions on homework by amending the Fair Labor Standards Act so th a t homework is not prohibited for any occupation and special permits would no longer be required. It requires, however, that such workers be paid at least the minimum wage First, the dramatic increase I I I On November 18, 1983, Senator Orrin Hatch (R-UT) i ntroduced CONCLUSION 1 In evaluating any policy, the results are much more important than the intentions. wage is a noble objective, but it is clear that.restricting homework is of no benefit to those supposedly being protected, and serves only to benefit politically powerful groups interested in curbing competition. With unemployment still high in the United States, the government should not be stifling job creation by such restrictive rules. More important a free society should not allow some to use the c oercive powers of government to enforce special interest laws at the expense of others who lack this power the Ilgovernment cannot create a special advantage for the American citizen without creating a special disadvantage for another So it is with bans o n allowing workers in certain industries to work at home Desiring that homeworkers receive a decent George Mason University economist Walter Williams notes that Any additional employment of factory l1 l2 Contact Lee Bellinger at The Center on National Labo r Policy, Inc 5211 Port Royal Road, Suite 400, North Springfield, Virginia, 22151.

Walter E. Williams Minimum Wage--Maximum Folly and Demagoguery The Journal of the Institute for Socioeconomic Studies, Winter 1983-1984 p. 33. 10 workers, supported by the monopoly bargaining position of their unions comes at the expense of the homeworker s who become unem ployed, and the consumers who must pay more for products.

Allowing homework adds to the options of wor.king Americans, giving them greater employment flexibility. women enter the labor force and new technology enables more work to be done at home, this flexibility is of critical importance As more and more Peter Germanis Schultz Fellow