Discover more from Gad’s Newsletter
The future of the gig economy: Growth and Regulation
Freelancers have existed since the dawn of civilization, while firms are in fact a much newer phenomenon (the first one, the Dutch East India Company was founded in 1602), so why are we so sure that firms and full-time work will persist as the main form of employment and treat the gig economy as a temporary effect. As an avid user of the gig economy, I am biased, but I do believe the future is gig.
"These workers often get individual gigs using a website or mobile app that helps to match them with customers. Some gigs may be very brief, such as answering a 5-minute survey. Others are much longer but still of limited duration, such as an 18-month database management project. When one gig is over, workers who earn a steady income this way must find another. And sometimes, that means juggling multiple jobs at once."
But to better understand the future of the gig economy, we need to discuss the main stakeholders involved in (almost) each transaction. While most people tend to think about the gig-workers, the customers, and the platforms, there’s an increasingly important fourth player, the government or the regulator.
More people will join the Gig Workforce
2020 was a challenging year for some and a good year for others. If you are an Uber driver, you probably saw a 91% decline in the number of rides, but you probably also delivered more Uber Eats orders than the previous year. Or maybe even started working for DoorDash. For example, In the third quarter of 2020, Uber Eats' bookings rose 135% year over year, and its revenue surged 125% to $1.45 billion.
Looking at it from a different angle, the WSJ had an interesting article several months ago, "Is It Insane to Start a Business During Coronavirus? Millions of Americans Don't Think So."
"Americans are starting new businesses at the fastest rate in more than a decade, according to government data, seizing on pent-up demand and new opportunities after the pandemic shut down and reshaped the economy. Applications for the employer identification numbers that entrepreneurs need to start a business have passed 3.2 million so far this year, compared with 2.7 million at the same point in 2019, according to the U.S. Census Bureau. That group includes gig-economy workers and other independent contractors who may have struck out on their own after being laid off."
I don't think this is temporary. About 36% of US workers are now involved in the gig economy, and 40% of US-based workers generate a large part of their income via the gig economy. We see high unemployment levels but also more firms allowing their employees to work from home, coupled with the fact that people are leaving the main cities (after years of urbanization), potentially working over multiple different time zones. It is quite evident that the labor market is readier than ever for more people to join the gig-economy "workforce" and in fact, we're going to see more opportunities for these employees. As I mentioned in one of my earlier posts, when I tried to set up the sound system for my home office, I used a sound engineer that I found through Upwork. It's obvious that the opportunities that specialists and experts like him see are growing rapidly as the friction to discover, interview, deliver the work, and pay is being reduced, allowing such workers to go beyond the local markets in which they live. And the wages are increasing over time: gig workers in the field of artificial intelligence earn an average of $115.06 per hour while also enjoying significant flexibility in their labor decisions.
More People and Firms Will Hire Gig Workers
The benefits to consumers are attracting more people to join these platforms. The example of the sound engineer above illustrates some of these benefits. I cannot justify hiring a full-time sound engineer, and neither does Wharton. The ability to find experts in very specific niches opens new opportunities. Firms and startups do not need to have developers on their teams if the only goal is to build a prototype and you can find a developer on Upwork. You do not need to have a designer if you can find one on Fiverr, and you don't need to own a car if you can use Uber to travel around town. I know that many people still own a vehicle, and many firms still employ designers. But some of that is cultural, and some of that is still the existence of frictions. McKinsey projected a few years ago (2015) that gig- work will increase the Global GDP by 2.7 trillion dollars by 2025. I am not going to try to defend this number. Still, by reducing the frictions we mentioned above, the gig economy allows us, as consumers, to do things that we would not be able to do otherwise and have access to experts and service providers at a scope, speed, and cost we never had.
More Gig Platforms will Emerge
The platforms are here to stay. They are well funded; many of them had successful IPOs over the last few years, which means that even if they keep losing money in the short run, they have the patience to perfect their business models. I see two emerging trends in the next few years: the emergence of new platforms for more specific services and the emergence of new platforms (or SaaS firms) that support gig workers along different dimensions of their work. As more customers get used to finding service providers on these platforms and as more workers join the gig workforce, the labor market will be lubricated enough for effortless launches of new gig platforms that address a specific niche or more general audience. For example, a few days ago, LinkedIn announced that it launched a Marketplace for freelancers, relying on its extensive knowledge of workers' work history.
Regarding the latter category of firms, we see startups like Catch trying to provide these gig workers with benefits such as paid leave and helping them invest their earnings. Firms like Venmo and Square make it easier for gig-workers to charge their customers and manage their payments. If we broaden the idea of the gig economy to allow for creators (from musicians to journalists), we can see that there is a whole new economy that emerges and enables gig workers to access new customers and monetize their interactions. For example, Clubhouse helps creators speak directly with their audience, live. Patreon allows them to monetize their fans and Substack allows more and more people to launch a newsletter and communicate with their audience, creating small local monopolies based on knowledge and expertise rather than geography.
The Government Will Have to Regulate
With AB-5 and Proposition 22 in California, states are already busy regulating the gig employment model. And it is clear that governments will need to take a more nuanced look at how to address the many new issues that emerge in this type of employment. In my work, we show that gig workers tend to exhibit inertia in whatever job they're doing now: the longer they work, the more likely they will continue to work. This may not seem like an issue for some tasks, but as drivers spend more time on the road, they pose a risk for themselves, for other drivers, and the passengers. I would argue that there are significant but more subtle issues, even if there are no externalities. Since many of these workers are independent contractors without job security, the boundary between work and leisure time erodes, resulting in people working continuously with potential impact on mental health and family life. As an economy, we may be drifting into a situation where every moment can be monetized, and we want to make sure that people can make choices that are supportive of their families and mental health while allowing them to absorb short- and long-term economic and personal shocks. Given that some of these are potentials for market failures, governments may have to step in and require the platforms to take some of these responsibilities, as suggested here by the … CEO of Uber.
"Khosrowshahi says lawmakers should require Uber and other gig economy companies to establish "benefits funds" that would allow workers to take out cash for every hour of work they put in. Under his proposed system, a driver working 35 hours per week could access around $1,350 in benefits per year."
The Gig Flywheel
To conclude, we have to go back to the original reason firms exist, and I oversimplify: Coase’s transaction cost economics. We prefer hiring someone for a full-time job, even though we need them only for a relatively short amount of time, just because of the complexity of the hiring, retaining, and managing the relationship with them (from incentives to knowledge leakage to many others). However, as transactions are becoming more straightforward, the complexity is being diminished and the frictions of hiring short-term workers are reduced. In a few years, the notion of a full-time employee may be a relic of the past. We are still a few years away from that. But, as more and more platforms emerge, more employees join this type of work, and more customers rely on these platforms, it will bring more platforms to emerge, resulting in the already humming economy-level gig flywheel. Firms are still going to be employing generalists, but for almost everything they need a specialist, they may rely on the gig economy.