There are two parallel stories relating to the U.S. labor market today. The first is what I call the “traditional” labor market story, which relies on the official monthly employment data released by the Bureau of Labor Statistics. Although unemployment has declined markedly over the past several years, these data still show worryingly high levels of underemployment, as exemplified by the large number of involuntary part-time workers, discouraged workers and workers who are long-term unemployed. This labor market slack has served as a drag on wage growth. The other story might be called the “gig economy” labor market story, which is likely largely missing from the official data, but which shows up all around us, in anecdotes about Uber and Lyft, fights against Airbnb, and stories about TaskRabbit in the media. In this article, I argue that this new economy is a largely positive development, a source of optimism, and perhaps represents an opportunity for people hurting in the traditional labor market to change their economic outcomes. Here’s why.
Search and Match
A large literature in economics studies outcomes in labor markets, such as the rate of unemployment and unemployment durations, using search and matching models. These models are built using a basic assumption: the more time and energy required to find a new job, the lower the likelihood that workers will match with good firms and earn good wages. During the recession, research suggests that the costs of finding a new job became really high, perhaps because too many workers were looking for a small number of similar jobs. The evidence shows that workers had difficulty moving from low-quality to high quality jobs, and as a result, workers either remained in low paying jobs or accepted new jobs at low wage firms. According to the latest BLS data, there are approximately 2 workers for every job opening, suggesting that workers are either not willing to work at the current job for the given wage, or firms cannot find the right workers for the job because of skill mismatches or because workers do not live in the regions where jobs are being created.
If the reason for persistent underemployment is high job search costs and skills mismatch, then the new economy seems to be finding solutions. One example is the peer-to-peer digital platforms, such as Uber, which allow drivers and riders to “find” each other easily. The search and matching costs of this market seem to be significantly low. After an initial screening, Uber drivers can simply download an app in order to access these “jobs”. The app allows drivers to decide when they want to offer their services and for what periods of time. This flexibility may explain the impressive increase in Uber driver partners from zero to 160,000 over the period 2012 to 2014.
An obvious reason that these matches are more easily formed is that the cost to the “employer” of providing the job opening is close to zero. “Employers” typically do not provide any material support to the worker such as a cab, office space or even a guaranteed wage and benefits.The employees are not typical employees since they are not working fixed hours for pre-decided wages. This explains why this economy is variously called the “sharing economy”, the “gig economy” or the “collaborative consumption” economy. Everyone is in it together.
So how should we think of this new economy? Is it good or bad?
What’s Good?
According to a study of Uber conducted by Alan Krueger and Jonathan Hall of 607 drivers in December 2014, these individuals cited many reasons for their desire to be Uber drivers, but mainly they valued the flexibility and the ability to supplement family incomes. Sixty-six percent of drivers still had a full time job and eight percent had been unemployed prior to becoming Uber drivers. About 25 percent were actively looking for a full-time job and another 25 percent were looking for a part-time job. About 38 percent of people did this as their main job working more than 35 hours per week.
About 91 percent of drivers said that serving as an Uber driver helps them earn more income to better support the family, while 87 percent praised Uber’s flexibility and 74 percent said that income from driving with Uber can provide some stability while other sources of income can be unpredictable. Women drivers were more likely to mention flexibility as an important reason.
In another report for Airbnb, about 62 percent of Airbnb hosts in New York say that being able to provide this service helped them stay in their homes. Similar numbers were reported across different cities. Anecdotal evidence suggests that people using TaskRabbit who do two to three tasks a day can earn almost $3,500 a month. The full-time workers can earn as much as $6,000-$7,000 a month.
What’s Bad?
A problem often pointed out with this type of work is that workers don’t get a full package of benefits. So what will happen to these workers when they become unemployed or become temporarily or permanently disability? What about health insurance? There are two responses to this argument. First, the perfect should not be made the enemy of the good. Yes, an optimal outcome would be for the labor market recovery to be strong enough to allow these workers the chance to access full time well paying jobs. However, in this economy, too few people have that choice. Moreover, many people opt to use these jobs even when they have full-time jobs and many unemployed workers use Uber to supplement family incomes. While the situation is not ideal, the solution would not be to deprive workers of these jobs by mandating that employers provide all or nothing.
Second, should we even expect benefits to be tied to jobs? With the Affordable Care Act, workers can buy health insurance individually on exchanges instead of relying on it through their employer, which improves their ability to switch jobs. In addition, innovative technologies have made it easier for these 1099 employees to keep track of their taxes and set up tax withholdings automatically. According to Rachel Botsman, guilds like Peers.org and Freelancers Union are even creating ways for independent contractors to pool bargaining power to access discounted health insurance and telecom plans.
It is true that we don’t completely understand how and why these new markets work and it may be years before they get captured in official data. However, these new markets are clearly providing an important opportunity for workers to supplement their incomes at a time when the traditional labor market is still recovering from the Great Recession. Let’s not try to fix something that isn’t broken by enveloping the “gig economy” in political and regulatory battles. Our energies would be better spent finding innovative solutions for the economy we appear to understand.
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