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Remote Work, salaried employment or self-employment? – Ernesto Schargrodsky (translation)

Ernesto Schargrodsky is a J-PAL affiliate professor and professor of the Torcuato Di Tella University. Link Original article

The Covid pandemic has accelerated the transition from face-to-face work to remote work worldwide. School classes, medical consultations, banking and commercial operations, legal and accounting services, design, engineering and architectural studios are just some of the activities that were already in that transition process. The pandemic also forced investments in new equipment and connectivity systems whose cost was slowing the transition in other sectors prior to the crisis. Now that investments have happened, part of this transition will not reverse at the end of the lockdown.

The numbers of this phenomenon are not negligible. Bonavida and Gasparini estimate that 26% of workers employed in Argentina could work remotely. An Isonomía survey shows that many employees do not want to return to face-to-face work after the pandemic ends. This partly irreversible transition from a face-to-face scheme to a remote one led the Congress to debate a law that seeks to protect the rights of both types of employees. However, this matter is not a simple one. Unintentionally, legislators may end up transforming potential salaried home-employees into self-employed workers.

Nobel Laureates in Economics,  Ronald Coase (1991) and Oliver Hart (2016) wondered about why companies exist and what are the factors explaining their size. That is, why some transactions and tasks are performed inside a market structure between free buyers and sellers, while others are carried out within firms with employed workers. Their response was that, while in market transactions product prices, quantities, and qualities must be agreed within changing and complex contracts, a firm, a manager or an owner exercises authority over the division of labor and assigns tasks to salaried employees. 

Armen Alchian and Harold Demsetz added that, when the production process requires teamwork, it is easier to observe within a company how much input each member provides than to determine, outside a company, the individual contributions to the collective output. Oliver Williamson (2009 Nobel Prize) added that companies prefer to invest in assets in their own facilities to ensure their exclusive use and care. On their own, all these advantages of organizing production within companies could have led to the existence of large firms.

However, when companies grow, their organization costs, incentives and internal controls increase. From the balance between benefits and costs of carrying out transactions and tasks within or outside a firm, the optimal size of each company emerges, which differs -of course- in different productive sectors and markets. A transition to virtual work noticeably upsets this balance. In remote work, it is very difficult to measure worker input. For example, it is very difficult to control how many hours an employee works. Even if you could measure the time you spend sitting in front of a computer, it should be verified that you are indeed working for the company.

On the other hand, in teleworking it is easier to measure the output that each worker produces, and if there is a team production, it is inevitable to clearly divide the responsibilities of each member. In addition, the assets provided by the company remain in the care of the employee in her home. They could be used for other tasks, or even be used to perform work for other competing firms, thus reducing the incentives of companies to provide them these assets, particularly if they are exclusive or confidential assets, programs or data. 

In summary, on one hand remote working reduces many of the advantages of keeping workers on a salaried basis because it is more difficult to control the input of each worker and protect the firm's own assets. On the other hand, independent work is facilitated because the company can better measure output and the worker can collaborate simultaneously with different firms.

For these reasons, it is likely that the transition towards remote working will be accompanied by a substitution of salaried employment for self-employment. This would reinforce current trends of job insecurity in Argentina with the substitution of private formal employment to self-employment schemes. To mitigate this partly inevitable process, legislation should avoid introducing rigid regulations to salaried remote work and instead increase its attractiveness to both employers and employees by increasing working hours flexibility, providing office rental savings, and reducing transportation and food costs outside the home. With the intention of equating their working conditions with those of face-to-face workers, legislators may unintentionally end up transforming teleworkers into self-employed workers.