Over the past decade, new institutions and technologies have made it easier for companies to hire self-employed contractors instead of employees. This has led to speculation that the U.S. labor market is becoming a gig economy. However, labor surveys show no rise in self-employment rates since 2000, even though the number of people reporting self-employment income on tax returns jumped significantly from 2000 to 2018.

A recent study by Carnegie Mellon researchers investigated whether tax returns were capturing a big labor market change missed by surveys.

A partial picture

They looked at data from online gig platforms and found that while more people have been earning money from these platforms since 2014, the amounts were small and mostly came from occasional driving jobs.

The researchers concluded that gig economy platforms do not explain the increase in reported self-employment income. Instead, the rise is due to individuals reporting more income to benefit from refundable tax credits.

“Our study shows that the increase in self-employment income reporting since 2000 is not due to the rise of gig work,” the researchers said. “People are more likely to report self-employment income when tax laws incentivize them to do so, even if their actual work hasn’t changed. This change in reporting behavior is driving the trend.”

Failure to declare

The researchers analyzed whether these self-employment trends were due to changes in what people chose to report, rather than changes in their work. They looked at people who had their first child around the end-of-year cutoff for Earned Income Tax Credit benefits. This allowed them to compare individuals who did the same work but received different benefits from reporting extra self-employment income.

The study found that people were more likely to report self-employment income when they had a financial incentive, regardless of the actual work they did over the year. There was no change in reporting among those without an incentive and no impact on firm-reported payments. The study also found that this reporting behavior has grown over time as more people have become aware of tax incentives.

“Changes in taxpayers’ reporting behavior are a major driver of discrepancies between the self-employment trends we see in self-reported information on individual tax returns and the trends in data reported directly to the IRS by firms,” the authors conclude. “Our findings caution against trusting trends in administrative data over trends in survey data without careful consideration of the process by which the data are generated.”