The history of the gig economy can be traced all the way back to 1915 when jazz musicians used the term “gig”, referring to their performances. Since then, a lot of gig work has been mainly related to music and the performing arts. Fast-forward to 1995, data showed that 10% of all Americans were engaged in alternative employment; whether as temporary, contractors, or on-call workers. In our modern society, the development of apps has been a key catalyst in the immense growth of the gig economy in recent years, and the continued digitization and technological advancement will continue to accelerate the supply and demand for freelance and contingent workers.
So, what exactly is the gig economy? The gig economy is made up of workers who work short-term contracts or freelance work, which also includes self-employed workers, instead of the traditional full-time job.
A large portion of the gig economy are freelancers, who by definition are individuals that work for themselves, rather than a specific organization. Although they can take contract work from different companies, they are ultimately self-employed. Popular freelance jobs include advertising, IT consulting, transcription, and design & illustration.
The current gig economy is largely composed of millennials who want to pursue non-traditional careers with increased flexibility. However, will the gig economy continue to grow? EY, a multinational professional services firm, suggests “more than one-third of the US working population is officially part of the gig economy and it is estimated that figure will grow to more than a half in the next five years”.
Beneficial for both employees and employers
From an employee’s point of view, jobs in the gig economy offer greater satisfaction largely due to the degree of autonomy that “gig jobs” offer. A report by McKinsey Institute stated that “Those who do independent work by choice (free agents and casual earners) report greater satisfaction with their work lives than those who do it out of necessity”. This statement applies to people from different countries, people of all income brackets, and education level. Free agents, meaning workers who do not have commitments restricting their actions, have a higher level of satisfaction than those holding traditional jobs involuntarily, “indicating that many people value the non-monetary aspects of working on their own terms.” Statistics on the satisfaction of gig economy workers in the U.S in 2018 suggest 37% are very satisfied while 43% are somewhat satisfied, a fact which is likely largely attributable to their independence.
Another benefit is the flexibility that the gig economy offers. As individuals reach different stages of life, they often change their interests. The same can be applied to jobs: 80% of respondents to EY’s survey listed increased flexibility to other commitments as a key benefit. Being flexible also meant that the gig worker can work anytime, anywhere. A research survey conducted by McKinsey found that “78% of gig workers say they’re happier than those working traditional jobs, while 68% say they’re healthier”. The satisfaction that the workers felt appears to contribute to the gig economy’s growing popularity. In addition, people are switching between job roles more frequently, as they recognize they may no longer need to stay in one position for a prolonged period of time. Furthermore, employers also do not have to commit high costs to retain gig employees. According to PayScale's 2020 Compensation Best Practices Report, 82% of companies gave increases to base pay in 2019—but two-thirds of those companies gave raises of 3% or less. Being flexible then allows employees to switch between jobs more easily and makes the employment process less costly for employers.
Some sectors suffered severely from the pandemic, with its flexible nature, the gig economy thrived as a result
Some sectors suffered severely from the pandemic, which has further contributed to the growth of the gig economy. The North American economy saw a similar phenomenon in response to the 2008 financial crisis, largely due to increasing levels of unemployment. In the U.S, approximately 9 million workers lost their jobs with the unemployment rate peaking in 2009, at 10%. During the crisis, unemployment led to more individuals beginning freelance work and taking on contractual positions to provide and earn income. According to Forbes, “The term ‘gig economy’ was popularized around the height of the 2008-2009 financial crisis, since then the task-based labor has evolved and has become a significant factor in the overall economy”. An article further stated that the ideal market condition for the growth of the gig economy is one where business and labor market conditions remain weak, with low business confidence and investment, interest rates near zero, negligible wages growth, and widespread under-employment”. Similar to the 2008 financial crisis, the pandemic has left many unemployed, with others forced to make changes to their existing roles into freelance roles. Data showed that the percentage of gig workers increased from 6.0% in 2008 to 6.8% in 2009 as some of those who lost their wage employment during the recession were “pushed” into self-employment. COVID-19 had a similar negative economic impact, affecting both employees and employers. In the U.S, tens of millions of people have filed for unemployment insurance since the beginning of the outbreak, and benefits are being claimed at four times the rate. The pandemic has resulted in unemployment for many and these jobless workers have taken to offer services on a more flexible or part-time basis. The growing demand for verticals such as food delivery and transportation has led to greater momentum for the gig economy. There has been a rise in wages for some gig workers such as warehouse laborers, moving van drivers, packers, and loaders. Reports say that wages in the gig economy have increased from $17/hr before the pandemic to $22/hr. From the business side, employers have become more receptive to gig workers due to their cost-effectiveness, reductions in operational costs, and ability to scale up operations.
But, what happens after the pandemic passes? Will this surge in the gig economy last? According to Upwork, a platform that connects freelancers to jobs, the “pandemic might usher in a new era of gig work”. Instead of phasing out with the pandemic, the gig economy may become an interim economy where employers need skilled workers but do not have the resources to bring them back full-time, turning white-collar workers to the gig economy. From an employee’s perspective, existing employees have an incentive to stay in the gig economy well after the pandemic because employers might offer better working conditions and benefits. Potential gig workers will also be attracted to participate for this reason. Partially due to the intense competition, companies will likely need to “step up and guarantee their workers safer conditions and likely better benefits'' if they want to continue operations and recover quickly once the pandemic is over. To do so, they will need to find ways to attract gig workers. In fact, in the state of California, situations are already improving for the local gig workers. Proposition 22 was a recent ballot measure that stated that app-based drivers should not be considered employees but instead are considered independent contractors. In other words, companies such as Uber and Lyft would not need to provide drivers the benefits an employee would otherwise receive. Prop 22 was the result of AB5, a California Assembly Bill which required companies who hired independent contractors to reclassify them as employees. Companies such as Uber and Lyft protested the law vehemently, “arguing it would eliminate driver flexibility, while also increasing consumer prices and wait times”. In response, companies proposed Prop 22, providing the “drivers and other gig workers with 120 percent of the state’s minimum wage, but only for hours when they have a passenger or are en route to a pickup.” Those active hours also apply to access to health insurance: gig workers who log 15 hours of active time a week are promised a health care contribution equivalent to 50 percent of the employer-provided average under the Affordable Care Act. Although the benefits are not provided without some restrictions, it is a step of improvement for the gig workers.
A potential drawback arising from the pandemic may result in a deteriorating working condition for the gig workers. The pandemic hit the economy hard, resulting in an increase in unemployment and business closures. As more companies hire gig workers, competition within the gig economy as well as between different corporations could harm the worker’s commissions and earnings. “The gig economy was booming and crowded with freelancers that wanted different revenue streams before the pandemic, and now it is at risk to become overcrowded”. This could mean that due to the increasing competition among gig workers, businesses may intentionally decrease the employee benefits associated with the contract. This rise in competition may continue after the pandemic ends, as “companies have started to shift from full-time job offers to multiple gigs, side jobs, and temporary employees in order to save on wages and benefits as they try to recover as well”. Companies also have an incentive to do so, largely due to a decrease in consumer demand and profit.
Even without a rise in labor supply, the current working condition of the gig workers is not ideal, this is a direct result of the immaturity in the government’s regulations. A common example you might have heard is how employers are exploiting their employees; this could mean very low to no income stability, benefits, health insurance, and employer pension contributions for workers. Furthermore, employers have also been laying off workers when they contracted COVID. The pandemic has increasingly hardened many employer’s opinions about the employment status of gig workers, that they are only temporary. An article by Bloomberg reported that“the industry’s critics looked at the last two months and saw a stark illustration of how the gig economy offloads costs and risk. “Uber and Lyft drivers who contract the coronavirus or lose their job quickly realize what they're missing” in terms of employment benefits.” said California Attorney General Xavier Becerra in a statement”. The immaturity of government regulations also results in lower tax revenue for the government as employers and employees find loopholes to avoid paying taxes. This is particularly true for self-employed gig workers. To begin with, their income is difficult to track since it “lacks the web of official reporting requirements that attends employment income.” If all the self-employed were to be fully audited, the CRA “calculated, up to $3 billion more in taxes would be assessed.” As more people enter the gig economy, the tax gap will likely increase due to an increasing number of tax invaders or workers who are simply unaware of the proper tax procedures. How to create, implement, and enforce tax regulations to minimize the tax gap is an issue that the government has yet to solve.
Advancing technology facilitate the growth of the gig economy
In modern society, technology plays an integral role in the gig economy, from enabling new business models, to create new roles for workers. The integration of apps and business models enabled companies like Uber, Lyft, and Airbnb to create jobs. These so-called digital platform businesses primarily use on-call contingent workers who use their own tools and equipment to carry out tasks associated with the supplied service.
For instance, to carry out its main operations, Uber introduced a rider app where customers could request a ride, notifying a nearby driver, and displaying where the driver is in relation to the customer and the estimated time of arrival. The customer can choose to enter the desired destination before or during the ride. Once the trip stops, the fare is automatically deducted from the customer’s account, making the process of calling a taxi ‘smarter’. Technological change and digitization of society have also created opportunities for freelance work in the gig economy. Companies are increasingly needing individuals for responsibilities such as graphic design, social media marketing, IT work, UI/UX design, and computer programming.
Technology has also facilitated the growth of the gig economy by improving the hiring process of gig workers. It does so by expanding the networks of employees and employers through online platforms. For instance, Fiverr is a platform for freelance professionals to connect with consumers. The platform that Fiverr created is a perfect opportunity to connect sellers to buyers and creates an efficient method for the exchange of freelance services and makes it easier for individuals to find and earn income from freelance work. As the use of gig workers increases, many companies have sought ways to better integrate their workers, improve their performance management process, mitigate compliance risk, and lessen administrative burdens. New technologies now can offer HR a more standardized view of all the full-time and contingent workers on one dashboard. This can help them manage their gig workforce more strategically since they will be able to “compare labor costs, worker availability, or skill sets” to maximize their talents. For HR managers who worry about compliance-related issues, some platforms clearly separate the independent contractors and full-time employees so they can apply the appropriate measures.
We believe that the gig economy will continue to grow because of its cost efficiency and flexibility. The current state of the economy also proves fertile for the growth of the gig economy, as well as the scalability offered by the ever-advancing technology.
However, the gig economy remains imperfect, largely due to the immaturity of government regulations and deteriorating working conditions for the gig workers. Nonetheless, the growth of the gig segment will inevitably prompt greater legislative recognition from governments, attracting more individuals to take part in the growing gig economy.