• Labor and Employment Issues in the Gig Economy: Q&A with Professor Paul Oyer 

    Paul Oyer

    In this Q&A, Paul Oyer, the Fred H. Merrill Professor of Economics at Stanford University, discusses the rise of the “gig economy” and the issues that the growth of the independent workforce poses for labor and employment policy and litigation. 

    Q: What is the gig economy, and where is it headed?

    Professor Oyer: The “gig economy” is a modern term for short-term work relationships. In contrast to having a traditional work arrangement with a single employer (which usually includes employer-sponsored benefits such as health insurance, contributions to retirement savings, etc.), “gig” workers are free agents. They take on assignments of varying lengths – from a quick Uber ride or a DoorDash delivery to a long-term stint as a contract worker for a single company. Gig workers are self-employed and opt to work whatever schedule is mutually agreeable for them and the people and the firms that demand their services.

    Technology has made it easier for workers and firms to find each other for short-term work arrangements, which has led to a rise in the size of the independent workforce. Most economists and others who study these types of alternative work arrangements expect the independent workforce to continue to grow as gig work becomes even easier to arrange. This likely will mean that employers, regulators, and litigators alike will need to consider new approaches to such issues as wage parity, worker exploitation, benefits provision, and worker classification.

    Q: Is the rise of alternative work arrangements only a recent phenomenon?  

    Professor Oyer: The use of the term gig economy is fairly recent, because it is associated with smartphone- and computer-enabled work arrangements such as Uber, DoorDash, or Upwork. However, gig work is just a natural extension of the many nontraditional jobs that Americans have held for decades. The independent workforce, composed of workers outside the traditional employer-employee relationships like independent contractors and temporary workers, has been a sizable part of the American workforce for a long time. Just as Uber now intermediates between riders and drivers, agencies have intermediated between those who demand certain services for short periods at a time and independent workers who provide these services. These workers range from highly paid actors and models to stenographers and videographers to farm workers.

    According to a study by Katz and Krueger, one in six American workers has a primary job outside the traditional employment arrangement. In working with a survey conducted by the Freelancers’ Union and Upwork, I found that about a third of American workers perform some sort of independent work, many of them in addition to their primary jobs. So the size of the independent workforce is quite large. Katz and Krueger also find almost all of the net employment growth in the U.S. economy in the last decade has been in nontraditional employment. However, only a small part of that increase is accounted for by workers who are matched to firms or clients through a technology platform. In other words, Uber drivers and other gig workers receive a lot of attention but are still a small part of the workforce. 

    Q: What are the potential benefits and costs of alternative work arrangements to businesses and workers?

    Professor Oyer: From an economic perspective, there are several major benefits to alternative work arrangements. Three big categories are flexibility (for both workers and firms), market “thickness,” and efficient use of time.

    First, flexibility for workers and firms is the primary economic benefit of the gig economy and other alternative work arrangements. Uber drivers, Upwork programmers, and other self-employed workers can earn significant pay while setting their own hours. In every survey of the independent workforce I have seen, flexibility ranks as the number one reason why these people choose nontraditional work. From the perspective of the firm, the ability to hire someone for a shorter period of time and at less than full time can be a great benefit, especially for those small businesses that cannot justify hiring a full-time employee for certain needs. However, there can often be significant time and resources associated with finding these short-term and part-time work arrangements for both workers and firms, which had eroded some of the value of flexibility. Technology has helped reduce these costs such that the value of flexibility has been unleashed.

    Second, intermediaries, especially online platforms like Uber and Upwork, make labor markets “thicker”; that is, having many more workers and firms who are looking for matches. Technology reduces search costs and expands the set of choices available to both workers and firms. The increasing availability of intermediaries expands opportunities for the independent workforce while providing firms greater chances of finding the specific set of skills they need. In other words, alternative work arrangements, especially together with better intermediary platforms, can lead to better matches between workers and firms.

    Third, independent work also generates efficiencies by allowing workers to spread their time across multiple clients (often worldwide) who can benefit from the special skillsets that these workers have. Alternative work arrangements enable businesses, especially small ones, to access specialized skills like software development, search engine optimization, and translation that they do not need or cannot afford on an ongoing basis. In the absence of a healthy market for independent work, these businesses may have to hire full-time employees who may not be fully utilized or may have to forgo benefitting from these services.

    These benefits come with one large cost for the independent workforce – potentially unpredictable and variable swings in income. However, it is often the case that independent workers have life partners with a steady income or they hold a traditional job in addition to the temporary work. Moreover, while some independent workers may prefer a traditional job over gig work, independent work is generally better than being fully unemployed.

    Q: What do you think are the most pertinent policy issues related to the gig economy?

    Professor Oyer: The gig economy portion of the independent workforce is relatively new and has been developing quickly. As such, new policy issues are presenting themselves, and we don’t really know which will be the most important and problematic. I can see three key issues, at a minimum: 1) potential exploitation of workers, 2) benefits (specifically, the degree to which they should be mandated or be portable), and 3) legal classification of workers.

    First, exploitation of gig workers may be a potential problem, because, unlike traditional employees, gig workers don’t have the right to form unions and bargain collectively under labor laws in most places. If Uber or some intermediary platform was able to develop “monopsony power” (that is, if it became so dominant that it was immune to competition in the labor market), this would be a serious concern. However, I do not see much evidence of imbalance in bargaining power between the gig platforms like Uber and the independent workforce currently. As of now, there is vibrant competition for these workers, and many of them are active on multiple platforms. For example, many Uber drivers also drive for Lyft, and many people who find work through Upwork also find work on Freelancer.com.

    Second, as the independent workforce has grown, there has been a push to mandate benefits for these workers that are comparable to those offered to traditional employees. At the same time, others have pushed for policies to make benefits more portable, allowing workers to take their benefits with them as they move and to use these benefits when workers participate in independent work, which may enhance labor market flexibility.

    Finally, a contentious policy issue for gig workers has been the topic of worker classification – whether these workers are employees or independent contractors. Litigation involving worker misclassification allegations are complicated and require careful analysis, as the distinction between different classifications matters more for some types of workers than others. What concerns me most about this issue is the possibility that firms, in response to well-intentioned but imperfect policies or laws, will change their business strategies to avoid the possibility that independent workers could be classified as employees. For example, I could imagine Uber or Lyft limiting the number of rides drivers can take in a week to limit the possibility that they could be classified as employees.

    If these labor markets remain vibrant, competitive forces should adjust compensation so that gig workers are paid the same amount no matter how they are classified. However, regulators, legislators, and employers will all need to take a thoughtful approach to managing these and other issues that will arise as the gig economy continues to grow in importance. ■


  • This feature was published in April 2017.