We have been hearing a lot lately about the Gig economy.
What’s the gig economy all about?
Let’s have a look at two participants in the gig economy.
This is a guy named Alexey who does computer software engineering and lives in Ukraine. This is his profile on a website called Upwork which is a freelancing platform in the world. He’s selling his work to people in the United States, it’s opened up an opportunity for him to make money beyond his parents’ wildest dreams because they could only sell their labor in Ukraine.
Another is a different guy, who lives in Sacramento. He drives for Uber. At the beginning of each week, he drives down from Sacramento to the Bay Area, spends four or five days in the Bay Area driving 14 hours a day for Uber, spends the night sleeping in the San Francisco Marina Safeway parking lot in his car. He’s making more money, stays busier as the surge rates are higher in the Bay Area.
So, both of these guys are gig economy success stories, and what’s interesting about them is from a broader labor economics’ perspective, they’re immigration stories. The gig economy is enhancing immigration.
How? What are both of these people doing?
They’re both doing exactly what people who have moved to say the US has been doing for hundreds of years. They’re taking their services, selling them in the US, and then taking at least some of the money and sending it back home.
When we say the gig economy, the people on gig platforms like Uber and Swiggy are a small part of the overall economy because most people who work in the gig economy have another job. So, when you include those people, we’re talking about 30% of the Indian workforce has some sort of job which has been growing because of technology making it easier for people to be free agents.
Now there are news accounts that equate working in the gig economy with exploitation. People that work in the gig economy make less on a per-year basis but that’s because they’re working fewer hours. On a per hour basis, they actually make more. Now they have to more just break even because they don’t get the benefits of a full-time employee. So, this is just some distributions you can see the gig economy workers are in green. This is a distribution of hours per week by people in the gig economy and the green line and people in the regular traditional jobs in the red line. You can see that the distribution’s much more spread out for people in the gig economy whereas they tend to be working ~40 hours. But the pay turns out to be very similar overall. But the point is that the pay is pretty similar across the two groups.
Technology’s enabled a lot of people to become free agents, to live much more flexible work lives. The beauty of the gig economy is the downsides are small. If you have a bad week or two, you know you can bounce back. If the economy deeps for a while, you lose 25% of your business. If you’re in a regular job and the economy dips there’s a low probability that you get hit with a very bad shock, which is to lose your job entirely.
Why would people ever employ somebody from the gig economy?
Well, the big advantages are, one is called labor arbitrage. If you’re going to have somebody in the New Delhi do a job instead of somebody in Silicon Valley, that saves you a lot of money. Faster onboarding, hiring gig workers makes it easier for you to downsize or change the workers, the workforce skill you have. And the fact that you can hire partial workers, you only need a half of an SEO specialist. You can get rid of people you don’t need anymore, bring on people you do and you can hire people for partial jobs.
Claudia Golden is a Harvard economist, said with the gig economy, the gender gap in pay would be considerably reduced and might vanish altogether.
So as current/future managers what does any of this mean to us? Well, these things are the key components of the labor costs. So how does the Gig economy help? Well, one way it can help is that we can just move our money through labor arbitrage. Another thing is if you just want to ramp up a job quickly getting somebody in through the Gig Economy can be very quickly done, and very economically done. And that lowers the number of vacancies and hiring costs. If you’re a start-up, you don’t want to hire somebody who you don’t have enough work for. But the problem is, you hire a group of people who are by definition transient. These people are leaving any time they want to. They’re free agents, that’s what they value. So, using them strategically can be very beneficial, but you have to think of it in only those parts of your business where you want to be transactional.
So far, the impact on the gig economy’s actually been pretty small. But it’s growing, and the reason for that is a lot of it can make the economy run more efficiently and technology’s allowing it to be more and more that way. A lot of people have preferences for flexibility that are enhanced nicely by it. There’s a lot of potential downsides like volatility. People feel like they’re second class status and, whether or not there are inequality issues is a different question. I think as managers we should think about the sort of ways, we can use this strategically. A comparative advantage around being able to be very flexible and to quickly up and downscale and bring on skills that other companies can’t.
McKinsey Global Institute. 2015, June. “Connecting Talent with Opportunity in the Digital Age.”
PwC. 2015. “The Sharing Economy.” Consumer Intelligence Series, April.
Adams, A. and Berg, J. (2017) When home affects pay: an analysis of the gender pay gap among crowd workers (http://dx.doi.org/10.2139/ssrn.3048711)
OECD (2018), Rethinking Antitrust Tools for Multi-Sided Platforms, http://www.oecd.org/competition/rethinking-antitrust-tools-for-multi-sided-platforms.htm
Tax Challenges Arising from Digitalisation — Interim Report 2018: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, http://dx.doi.org/10.1787/9789264293083-en