The Gig Economy and the Disintegration of the Traditional Labor Contract

Today’s job-seekers have lots of technological tools at their fingertips to make their job search easier: email, smartphones, and job-related apps of all kinds.  The Internet allows people to apply to dozens, scores, and even hundreds of jobs.  While this may make it seem that job-seekers have more power in the market, the opposite may actually be true.  Critics allege that today’s gig economy harms workers by removing the benefits of traditional employment and labor contracts, leaving workers with little stability.

Potential Benefits of the Gig Economy

The gig economy is used to describe workers who take on one or more part-time jobs that are highly dependent on either remote work or online workflow scheduling.  Work is typically hourly or by quick project, with workers deciding how frequently to work.  Workers can often choose which jobs or hours to accept.  Common examples of gig economy jobs include rideshare drivers (Uber and Lyft), food delivery drivers (Uber Eats and Door Dash), freelance writers and academic tutors, and taking on odd jobs like babysitting, dog walking, yard care, or simple household repairs.

Flexibility

Being able to choose how many jobs or hours to work provides lots of flexibility, which is popular with many workers.  The workers most advantaged by the gig economy are part-time workers who may still be in school or need to devote blocks of time to other responsibilities or full-time workers who want some additional income.  Research finds that many workers in the gig economy are seeking additional income rather than trying to make a living.

Unlike traditional part-time jobs, gig employees rarely have to purchase uniforms, clock in at specific times, or adhere to a lengthy contract.  This means workers don’t have to wash uniforms, adhere to set schedules, or worry about leaving their gig job to pursue other opportunities.  More workers may accept gig jobs if they know it’s just for extra cash and will not be a substantial portion of their resume; they can even omit gig jobs that do not fit with the employment history they wish to convey.

Reduced Marginal Cost of Employment

The flexible nature of the gig economy reduces the marginal cost of taking on one of these jobs.   These reduced marginal costs make gig jobs profitable at lower wages than otherwise, especially if the gig jobs can be seen as complementary to their other endeavors.  If the gig jobs are similar to their full-time jobs, workers can use materials and skills from their full-time job to make additional revenue.  Even some time at the full-time job may be devoted to completing gig job tasks, such as freelance writing or content creation - though this may be unethical.

Complementary Skills and Experience

A teacher may take gig jobs as a paid tutor or freelance academic material content creator.  Although the hourly pay may not be high, the teacher can count these gig jobs as contributing to his or her skills as a full-time teacher.  Additionally, because there is rarely a fixed employment address with gig jobs, gig workers own and keep the equipment they need for those jobs.  They can use this equipment for personal needs or at other jobs.  As a result of these complementary benefits, many workers may pursue gig jobs at lower wages than they would accept in traditional part-time jobs.

Potential Harms of the Gig Economy

Overabundance of Applicants Depresses Wages

The perceived benefits of the gig economy attracts a lot of workers, which increases the supply of available labor and depresses wage rates.  Low wages are a regular issue among gig workers, with some research showing that up to one in seven gig workers averaging less than the U.S. federal minimum wage.  In the gig economy, workers are typically considered independent contractors, meaning employers have little incentive to offer raises compared to traditional employees who undergo performance evaluations where their tenure on the job is noted.  Experienced freelancers may command higher wages than rookies, but still have little market power due to many available substitutes.

Reduced Transaction Costs for Employers Reduces Incentive to Invest in Employees

Being able to hire dozens of part-time gig workers via a smartphone app reduces firms’ incentive to invest in existing employees.  The ease of finding and onboarding new labor reduces the transaction costs associated with recruiting and hiring, which means firms will do it more.  This can lead to lower long-term productivity as firms abandon traditional efforts to invest in employee skills.  If a worker invests in his or her own skills, such as by completing additional education or certifications, a gig employer may choose to end their job rather than pay a higher wage.  This keeps costs low, but reduces gains in productivity.

Labor Market Churn Can Depress Long-Term Growth

On a broader scale, the gig economy can harm both workers and firms by leading to neither side wanting to “commit to the relationship.”  Gig workers may delay major life milestones, such as marriage, purchasing a home, or having a child due to career instability.  Firms may also delay major capital investments if their labor is predominantly gig workers, fearing that temporary gig workers are unsuitable for handling significant projects or company expansions.  As a result, enterprises are less likely to grow into large, stable companies.  This can lead to higher rates of frictional unemployment due to labor market churn and a shrinking long-term labor market due to low birth rates.

Unemployed Gig Workers May be Denied Unemployment Benefits

Gig workers typically do not receive benefits like health insurance, retirement plans, or paid time off.  Often, they are 1099 employees who must pay their own tax burden every spring when they file their taxes.  Essentially, gig workers receive cash only for each hour worked or task completed.  This means gig workers who become ill, injured, or laid off receive no income at all.  Unemployment benefits are only paid to workers who paid into those programs via taxes, meaning most gig workers are ineligible due to their status as independent contractors.  As more workers become part of the gig economy, this can depress the overall funding available for unemployment programs and lead to more unemployed workers in desperate conditions due to lack of eligibility for such programs.

Overall:  Gig Economy Benefits Those Who Already Enjoy Stability

It’s not easy relying solely on the gig economy for one’s income.  These jobs are flexible and easy to get, but may offer unstable income, few benefits, and employers not looking for a long-term relationship.  Thus, the primary beneficiaries of the new gig economy are those who already have a stable financial situation, either through a full-time “day job” or due to status as a student or retiree (i.e., not a member of the labor force).  These individuals are looking to supplement their existing income.  If available gig jobs are mostly being filled by full-time workers, students, or retirees, new members of the labor force who need them as a primary source of income may be “locked out” of the labor market.

Unfortunately, new members of the labor force may struggle to compete in the gig economy due to their lack of an advantage.  Gig jobs are open to most competent adults with most schedules, meaning that new graduates with open schedules are not necessarily highly preferred.  If all Uber Eats needs is a licensed driver with a reliable car, a retiree with a Ford is just as desirable as a fresh college grad with a Toyota.  This can lead to increased unemployment among young workers and even overemployment among older, full-time workers.