The Gig Economy, Labour Market Flexibility and Monopsony Power

An increasing number of young workers are taking part in the gig economy, where laborers sign up to complete individual tasks and are generally classified as independent contractors rather than employees of a firm.  Many people are attracted to gig employment due to its flexibility, with workers able to set their own hours and take only the jobs they wish.  However, this flexibility is balanced by lack of job security, with gig workers given few or no guarantees of available work (and, therefore, wages) or employment rights.  Gig workers are typically young, disproportionately minority, and consolidated in unskilled labor industries.

History of the Gig Economy

Although most people think of the gig economy as a modern evolution shaped by the smartphone, its roots go back centuries.  During the 1800s and onward, day laborers could be picked up for simple, individual tasks by factories and farms.  During World War II, temp agencies sprang up to help businesses find unskilled or general skilled workers to do jobs on a short-term basis due to millions of men leaving full-time jobs for the armed forces.  The success of temp agencies continued after the war, with young people (often young women) distributed by these agencies to fill in at jobs while the permanent employee was on temporary leave, such as a vacation.  

By the 1970s, temporary workers became seen as a permanent part of the labor force, with some companies intentionally relying on temp workers to easily adjust staffing to minimize labor costs.  As independent contractors, temp workers received only hourly wages and not medical or retirement benefits, making them more cost-efficient.  Starting in the mid-1990s, employers could use the Internet to seek temporary workers directly, rather than through a temp agency, beginning with websites like Craigslist.  After the emergence of the smartphone in 2007, the modern gig economy emerged as workers could accept individual tasks - from transporting a passenger to delivering food - while on the go.  Today, several app-based gig employers are popular with young workers, including Uber and UberEats, DoorDash, Instacart, and TaskRabbit.

Gig Platforms as Monopsonies

Despite gig workers having flexibility and freedom when it comes to their time, they have essentially no bargaining power as independent contractors.  Many are also gig workers because they lack the tools and qualifications to become full-time employees of firms.  Thus, gig platforms are often monopsonies (single employers of a resource) for that segment of labor.  As monopsonies, they are wage-makers and can set the market wage for these workers, who have little choice but to accept it or remain unemployed.  

Wages in the Gig Economy

As monopsonies for non-traditional workers in urban areas, gig platforms can offer low wages compared to other employers.  Thanks to modern technology, they can use dynamic wages as well as dynamic prices to maximize their profit.  During periods of high demand, gig employers (and their algorithms) can temporarily increase worker wages to attract more labor.  This ensures sufficient labor to capture all available consumer demand, leaving no potential profit unclaimed due to lack of capacity.  However, during periods of low demand, gig workers can face reduced wages as the algorithm reduces pay-per-gig.  Some workers will exit the gig labor market during these lulls, at least temporarily, helping keep prices higher for consumers.

Differences From a Pure Monopsony

Although the gig platform may be the only hirer of a specific subset of the labor market, it is not a pure monopsony in that it does not have to raise wages for all workers simultaneously to avoid labor unrest.  Traditional pure monopsonies, where workers were often physically present at a single job site, had to give any wage increases to attract new employees to all existing workers.  Gig platforms, by contrast, can avoid disclosing which employees are getting perks and raises due to the individualized nature of algorithmic payment.  To attract new workers, gig platforms may offer incentives only to new hires.  If existing workers complain, the gig platform will invite them to log off.

Welfare Implications of the Gig Economy

Worker Classification Issues

Gig workers are independent contractors, meaning they are solely reliable for their work and productivity.  If an independent contractor has unacceptably poor work performance, even when working for a firm, the firm is typically protected from legal liability.  For example, the mistakes of an Uber driver do not typically subject Uber, as a firm, to liability.  While many workers still accept this full liability risk in exchange for tremendous schedule flexibility, workers’ costs may be higher than expected, including insurance and training fees.  As independent contractors, gig workers often have little recourse when arguing that they should be compensated for these costs, which may not be fully disclosed by the platform when workers are signing up.

Power Asymmetry Between Platforms and Workers

A significant controversy in the gig economy is the power asymmetry between workers, many of whom are young and from lower socioeconomic strata, and platforms that are entirely online.  The online nature of hiring, onboarding, workflow, and payments means that gig workers have little opportunity to seek clarification or recourse in the event of confusion or disputes.  Workers can be de-platformed without warning in the event that they are deemed no longer desirable by the firm.  This can subject gig workers to unfair termination in the event of any customer complaint or labor dispute, with workers given no opportunity to plead their case.

Labor Market Statistics

While the gig economy has been credited with offering flexible employment opportunities for those with circumstances unsuitable for traditional brick-and-mortar jobs, critics worry that lack of worker protections in the gig economy could lead to a worsening labor market participation rate.  If workers come to feel that gig market wages and job protections are too low to justify the effort and risks of doing that work, they may drop out of the labor force altogether.  Over time, there may be market failures in the gig economy as workers come to feel discouraged at lack of job security, opportunities for raises and advancement, and support from colleagues and supervisors.  This would lead to an increase in unemployment (or the number of discouraged and marginally attached workers), potentially increasing burdens on taxpayers.