I met Liya Palagashvili in April 2023, when we were both witnesses before the U.S. House of Representatives Subcommittee on Workforce Protections. It’s hard to express how happy I was that she was there. While I got good grades as a kid in calculus and statistics, I hated those classes. I wanted to go back to English class and play with the words.
Palagashvili is an economist with the Mercatus Center at George Mason University, and she happily—and powerfully—brings statistically significant numbers to the fight to stop freelance busting.
Palagashvili and her team did first-of-its-kind research about what California’s freelance-busting law, Assembly Bill 5, did in that state. Their research revealed that after AB5 went into effect:
Self-employment decreased by 10.5% on average for affected occupations
Overall employment decreased by 4.4% on average for affected occupations
She has since been looking at the regulatory language that’s at the heart of Assembly Bill 5—regulatory language known as the ABC Test—and whether it has had similar impacts when it has been used to determine independent-contractor status in other states.
The introduction of an ABC Test caused significant declines in traditional (W-2) employment, self-employment, and overall employment
The ABC Test reduced traditional (W-2) employment by 4.73%
Self-employment fell by 6.43%
Overall employment fell by 4.79%
Occupations with high shares of independent contractors experienced the largest reductions in employment
For her public comment just filed in opposition to New Jersey’s proposed ABC Test independent-contractor rule, Palagashvili dove into the data she has that is specific to the Garden State.
Her results show that in New Jersey, use of the ABC Test has already led to harmful effects compared to states that do things differently:
a 3.81% decrease in W-2 employment
a 10.08% decrease in self-employment
a 3.95% decrease in overall employment
She also wrote that “the New Jersey data reveals stark gender disparities: women's traditional W-2 employment declined by 7.40%, while men’s showed no significant change—raising concerns about disproportionate impacts on women following the policy change. This pattern suggests the policy may inadvertently create gender-specific barriers in the labor market while failing to deliver its promised worker protections.”
That part of her public comment really raised my eyebrows. Because as I just testified before the U.S. Senate a couple weeks ago, members of the California Advisory Committee to the U.S. Commission on Civil Rights noted what appears to be a similarly disproportionate, and negative, effect on women.
Gender discrimination is also one of the accusations in a recently filed federal lawsuit against the State of California over its freelance-busting law, a lawsuit that is related to a California state Assemblyman calling on the U.S. Department of Justice to investigate this kind of policy-making.
And notably, the grassroots group that I co-founded entirely alongside other women, Fight For Freelancers, has a nationwide membership that is 87% female.
Here’s my conversation with Palagashvili, based on the public comment she just filed in opposition to New Jersey’s proposed independent-contractor rule.
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Q&A with Liya Palagashvili
Your public comment states that while this kind of policymaking might lead to reclassification of some genuinely misclassified employees, any positive effect is overwhelmed by the negative impact on properly classified independent contractors who can no longer work.
And interestingly, your comment also states that misclassification is not nearly as widespread as the freelance busters continue to claim. We routinely are told that 10% to 30% of employers misclassify their employees as independent contractors. Your public comment says that’s wrong—that the percentage of actual misclassification is much, much smaller.
Indeed, state audit reports using random sampling methods consistently find that only 1% to 4% of workers across all industries are actually misclassified, with most cases concentrated in construction and personal and care services.
This means 95% to 99% of independent contractor relationships are legitimate and properly classified.
Those percentages are absolutely enraging to me. If your research is accurate, then it suggests we have all been enduring this freelance busting under false pretenses, all across the country, for years now.
How do you do your research into the ABC Test effects in particular?
I’m an economist specializing in labor market policy. Our research team conducted the first causal empirical analysis of the ABC Test across the United States from 1990 to 2024. This research, which is currently under review for publication, analyzes employment outcomes in nine states that use ABC Tests: New Jersey, Massachusetts, New Mexico, Hawaii, Illinois, New Hampshire, Maine, Nevada and California.
The study uses the Callaway and Sant’Anna Difference-in-Differences (DiD) approach and an event-study framework tailored to settings with staggered policy adoption to isolate the causal effects of ABC Test adoption on employment, traditional (W-2) employment, and self-employment.
The study uses monthly employment data from the U.S. Bureau of Labor Statistics and the Census Bureau’s Current Population Survey. It designated states that adopted the ABC Test as the treatment states, and states that continued using right-to-control or common law standards as the control states.
Our research consulted with a law firm to confirm the ABC Test states and the timing of when the ABC Test went into effect.
OK, I followed about 90% of that. I think what you’re saying is that you compared states that implemented the ABC Test against states that don’t use it, and then you figured out the difference in what happened with self-employment, traditional employment, and overall employment starting from the times when the ABC Test was implemented.
And your findings were that in the states that used the ABC Test, the result wasn’t a whole bunch of new jobs being created, but instead significantly negative outcomes.
Is that correct?
Yes. Our comprehensive analysis reveals that ABC Tests fail to achieve their intended policy objectives, and produce significant unintended negative consequences for workers.
What you’re talking about, I think, is what my math teachers used to describe as “statistically significant.” Right?
Yes. All key results are statistically significant at conventional levels, indicating these outcomes are highly unlikely to have occurred by chance. They represent systematic, policy-induced labor market disruption.
Our findings represent changes in employment in ABC Test states relative to the control states (states that use the common law or right-to-control tests).
These findings demonstrate that ABC Tests do not simply reallocate workers from independent contractor status to traditional employment. Instead, they reduce employment across all categories, exacerbating job insecurity and restricting access to meaningful work.
And you made charts! Thank you for making charts, for all of us who are not economists ourselves.
We call these the event study graphs. The vertical dashed lines in these graphs represent the time the ABC Test went into effect, and the Y-axis coefficients show the estimated change in employment relative to the pre-implementation period, which means before the ABC Test went into effect.
This is the impact of the ABC Test on traditional (W-2) employment:
This is the impact of the ABC Test on self-employment:
This is the impact of the ABC Test on overall employment:
Anybody can clearly see the effect in these graphs. Those lines are all going down, down, down starting with that dashed vertical line, which is whenever the ABC Test went into effect.
It seems like the effect of the ABC Test actually gets worse with more time.
That’s correct. Overall employment and traditional (W-2) employment exhibit a significant and sustained decline after adoption, worsening notably over the subsequent five to 15 years.
In contrast, self-employment shows an immediate sharp drop following implementation, followed by a slight short-term rebound before experiencing a prolonged and pronounced decline.
All of those downward lines would have to include legitimate independent contractors who are being thrown out of business unnecessarily. Right?
What I can say is that while our data did not allow for identifying specific mechanisms, the empirical patterns could be suggestive of an “overkill effect,” where legitimate independent contractor relationships are systematically disrupted.
“Systematically disrupted.” Those are some words I’ll bet we’re about to hear lawyers start using soon.
The policy might successfully reclassify some genuinely misclassified workers as intended, but any limited positive effect is overwhelmed by the much larger negative impact on properly classified independent contractors who can no longer meet the stricter legal criteria.
This mechanism explains why we observe declining employment across traditional W-2 jobs and self-employment—rather than the simple reallocation from independent contractors to employees. The result is net job destruction rather than job protection.
Anecdotally, we saw this happen in the wake of California’s AB5, where entire businesses shut down. These are businesses that had worked with both W-2 employees and independent contractors.
How did you and your team at the Mercatus Center do the analysis that’s specific to New Jersey?
Our research team conducted a targeted analysis isolating New Jersey as the sole treatment state while maintaining the same control group of common law states, ensuring methodological consistency with our broader multi-state study.
This approach leverages New Jersey's ABC Test implementation period from 1995 to 2024, providing nearly three decades of analysis. The findings represent true causal effects—not spurious correlations—all statistically significant at conventional levels.
Let me make sure I have this right. What’s happening, according to your analysis, is that we already have this ABC Test causing harm in New Jersey.
And why this matters more than ever right now is because the state’s Department of Labor & Workforce Protection wants to implement an interpretation of the ABC Test that legislators say appears to depart from the existing statute, and that attorneys say would be even stricter, so much so that one attorney wrote the proposed rule-making “almost entirely eviscerates any chance for most ICs and companies using their services from establishing the workers’ IC status.”
This is all, in a word, horrific. And according to your analysis, women are already getting hit by this deeply misguided policy even harder than men.
It is a troubling finding. The New Jersey data reveals stark gender disparities: Women’s traditional W-2 employment declined by 7.40% while men’s showed no significant change.
This pattern suggests the policy may inadvertently create gender-specific barriers in the labor market while failing to deliver its promised worker protections.
I wonder if that disproportionate effect on women may be happening because, as the U.S. Small Business Administration Office of Advocacy has noted, women are closer to parity with men when it comes to ownership of non-employer firms, which is government lingo for being independent contractors.
In other words, a majority of companies that have employees are owned by men. If you’re a woman, you’re more likely to own a company that has no employees. You’re just your own boss. So if an overly restrictive government policy targets independent contractors, it’s more likely to hit women.
The SBA Office of Advocacy made a handy-dandy chart to show that, actually.
Yes, that’s quite possible. What I can say from our findings is that according to state audit reports, less than 5% of workers across all industries are misclassified, with most cases concentrated in the construction sector and in personal and care services.
Critically, state audit reports using random sampling methods—which provide the most statistically representative estimates—consistently find that only 1% to 4% of workers across all industries are misclassified. This means 95% to 99% of independent contractor relationships are legitimate and properly classified.
Implementing sweeping ABC Test regulations to address such a narrow problem risks significant collateral damage to the overwhelming majority of properly functioning independent contractor arrangements.
What do you suggest the State of New Jersey, and other states and federal lawmakers, should be doing instead of pushing for these overly restrictive freelance-busting policies?
Rather than adopting broad ABC Test codification that harms legitimate workers while attempting to catch a small minority of violators, New Jersey could, instead, pursue targeted enforcement in industries with documented misclassification problems. This more precise approach would maximize enforcement effectiveness against actual violations while protecting the 95% to 99% of independent contractors who are properly classified and choose this work arrangement.
Rather than helping workers, the proposed rules risk harming the very people they intend to protect while imposing significant costs on New Jersey's economy. The weight of empirical evidence demonstrates that broad ABC Test implementation creates more problems than it solves.
Very important information to amplify. Leave it to Liya to quantify the real incidence of misclassification.