At least 440,000 workers in Los Angeles County nearly one in 10 are considered self-employed, according to new estimates from state employment data, helping buttress a local economy whose job growth from payrolls has been sluggish.

This rise of the self-employed explains a puzzling development in L.A. job figures: the widening of the gap between the civilian labor employment figures (from which unemployment figures are calculated) and company payroll data, which as of July was at an even 4 million for Los Angeles County.

The gap, which stood at 400,000 three years ago, has now grown to more than 600,000 and is touching off a debate among economists on the reliability of state jobs data.

"All these self-employed people are generating income and then spending that income locally," said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange. "It helps explain why the overall level of economic activity that we see every day all around us is stronger than payroll job growth would suggest. In no way can you account for the incredible demand for high-priced housing that we're seeing just by looking at the payroll employment numbers."

But what may be a boon to the local economy may not be so rosy for government coffers. Many self-employed either under-report their income to lower their tax bills or avoid paying taxes altogether.

This has prompted sporadic crackdowns from state and local government tax collectors. A program launched three years ago by the city of L.A. to prod scofflaws into paying their business taxes has foundered amid opposition from screenwriters who said they were being unfairly targeted.

"We're probably not capturing as much tax revenue as we would have had all these people been on payrolls," said Jack Kyser, chief economist with the Los Angeles Economic Development Corp.

Hard to monitor
Reliable data on the numbers of self-employed has evaded economists for years because of the difficulty in identifying these workers. They can include screenwriters, computer consultants, construction workers and real estate agents jobs that cannot be tracked by standard payroll information.

The only way the state hears from most of the self-employed is through payment of income taxes. State Employment Development Department data on the self-employed is extrapolated from a sample of 5,500 households a tiny fraction of the overall workforce of 17 million.

For L.A. County, the sample size is even smaller about 1,200 households. That's too small for the state to come up with official estimates of the self-employed.

The Business Journal obtained the EDD's ratio of self-employed to total employed in the civilian labor pool, then multiplied that percentage by the total employed in L.A. County's civilian labor pool to come up with a rough estimate. L.A.'s workforce is nearly 30 percent of the state's total and therefore usually tracks fairly closely with state employment averages.

The percentage of self-employed 9.7 percent as of July is well under the all-time high of 11 percent in the mid-1990s after the severe recession earlier that decade prompted thousands of laid-off aerospace workers to hang out their own shingles. But L.A.'s civilian labor employment reached a record 4.6 million in July, and the number of self-employed has grown with it.

"The state payroll data has not kept up with the changing nature of the economy, where you have more independent contractors and more self-employed than ever before," Kyser said.

A number of L.A.'s most dynamic industries, including entertainment and technology, are structured so that large numbers of workers are independent contractors. "Whole industries have reorganized themselves so that they have fewer payroll employees and more contract workers," said Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto.

The Entertainment Industry Development Corp. has found that for every two payroll jobs in the industry, there is one worker not on company payrolls. Screenwriters, production specialists, agents and actors are often classified as independent contractors, with many floating from job to job.

In the garment sector, where workers are often classified as independent contractors.
Another factor may be at work here: rising benefit costs.

More companies have reclassified their workers as independent contractors, forcing them to obtain their own health care insurance.

The ranks of the self-employed tracked by the state tend not to include workers in the underground economy who operate entirely on a cash basis, such as many housecleaners and day laborers. "These people, even in the unlikely event that they are reached by state surveyors, are not likely to tell them they are working," Levy said.

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