Recently I entered the Northeastern essay competition with the title of: Does the expanding gig economy contribute positively to sustainable economic growth? This is the essay I completed and submitted with a few edits.
From Taskrabbits and Ubers to tutors and Air BnBs, the gig economy surrounds us, and we rely heavily on its functioning. With the immense rise of technology, this type of economy has emerged to be a transformative force in the labour market, however we are yet to see long-term effects of this employment powerhouse.
The gig economy is a labour market that employs temporary or freelance workers with short-term contracts, as opposed to offering traditionally permanent employment contracts. Sustainable economic growth implies continued economic development whilst accounting for environmental prosperity, social equality and evolution for future generations.
The gig economy has grown substantially in the United States, contributing 557 billion USD since 2014. It is a lifeline and appealing convenience for people looking for freelance work. The monetary growth of the gig economy is directly proportional to the inflow of individuals, which is beneficial to the economy. However, a larger gig economy labour force exacerbates social insecurities and inequalities, which in turn threaten economic stability.
One positive impact of the gig economy on sustainable growth is its effect on a nation's overall output through the industry's entrepreneurship quality. The gig economy is based on an individualistic framework where people are essentially self-employed and can, therefore, run their own one-person entrepreneurial business. This promotes and requires proactivity, which further encourages ownership over one's work, leading to a higher standard of performance and, therefore, maximising output. As workers are not constrained to more permanent employment, they are able to explore their creativity to yield their own success through the creation of startups and small businesses. This supports sustainable economic growth because there will be an increase in the number of industries and businesses that support monopolistic competition in certain sectors. Consequently, this leads to an increase in competition, which encourages efficiency as firms move closer to the PPF curve.
Nonetheless, entrepreneurial success may be hindered by the wage disparities that can form between temporary workers and those with permanent employment, thereby making the gig economy less desirable. A benefit of working blue-collar jobs in the US is the ability of unions to protect workers' rights and wages. These unions have significant legal power and ensure that the workers receive fair compensation when an economy has high inflation or is facing a cost-of-living crisis. For example, British tube drivers have a strong work union (the ASLEF), which allows for wage increases in situations of economic distress. In March 2022, the UK economy was battling 7% inflation, so the ASLEF fought for an 8.4% increase, which was received. Individuals in the gig economy lack traditional union action, which, therefore, exacerbates potential wage disparities in some industries. Additionally, the gig economy is at a disadvantage as unions also protect the workers' rights, meaning employees of the gig economy are more vulnerable to exploitation. These potential disparities are not sustainable as they could cause social unrest and potentially even the demise of the gig economy itself as the job environment becomes less desirable. The additional lack of promotion in the gig economy means workers have a lack of incentive, which could mean the disadvantages outweigh the benefits of being in the industry, so people leave. Overall, these disadvantages would put a strain on the entrepreneurial benefits and potential of the workers.
Working under a zero-hour contract allows individuals to control their schedule, enabling them to dictate their working hours. Hence, gig economy employees can have a healthy work-life balance by governing their choices. This option has become increasingly popular, especially among economically inactive individuals, who would otherwise be redundant. For example, stay-at-home parents can contribute to the gig economy, provide their families with extra income, and maximise their personal utility. An example of flexible gig employment would be in the rideshare sector: Uber. Uber enables individuals to have flexible employment. The drivers have control of their working hours and, hence, are able to balance numerous commitments whilst receiving income from their share of work. As a corporation, Uber has been successful in operating this model, generating $394 million in the 2nd quarter of 2023. This flexibility enables those previously economically inactive to contribute positively to the economy. On the whole, the flexibility of the gig economy contributes to a sustainable economy as the previously economically inactive citizens now have a way of finding minimal work and be a part of the economy. This means individuals have a higher consumption from their higher income, which adds activity to the economy.
However, with the advantages of flexibility comes the lack of job security. While flexibility is good for the individual, temporary work means that if an individual is no longer needed on a project, their contract can be terminated without notice. This results in the contractor experiencing frictional unemployment while searching for alternative employment. If one relies on the flow of gig economy opportunities, this can leave an individual in a detrimental financial position for a period of time, during which they will also not be positively contributing to the economy. The highly competitive nature of freelance and contractor work also adds to the sense of insecurity around employment. This takes away from a sustainable economy as consumer confidence plummets, which leads to individuals saving more and spending less, decreasing the demand. This could create economic stagnation as there will be less activity in the economy. Therefore, the positive effects of flexibility can, in fact, be consequential to the economy if employment opportunities are scarce.
Furthermore, with flexibility and self-employment comes the lack of legal protection. Whilst traditional labour laws apply to both full-time and temporary workers, there is a significant difference in the benefits they receive. For temporary workers with short-term contracts or freelance workers, an employer has no legal obligation to provide any job benefits, including contributions to a pension or healthcare plan. Through the use of the gig economy, a firm enables a more efficient allocation of the resources which would have been spent on the benefits to a permanent employee. For example, in the United States, if an individual is eligible for a state pension, the employer must contribute 6.2% of the employee's gross salary to the state pension, and the individual must also contribute 6.2%. If a person is self-employed, to build up the same pension, they must contribute the full 12.4% themselves, and in many cases, they fail to do so. Another example is United States SIS healthcare, where employers must contribute 1.45% of the employee's gross salary to Medicare, which could alternatively be invested into the business.. Overall, businesses' savings from the gig economy allows them to grow faster and more efficiently, hence positively impacting the economy.
Regarding the negative impacts of the gig economy, if an individual does not have insurance, then medical costs can significantly strain their finances and, in some cases, result in personal bankruptcy. An appointment with a doctor in the US costs between 300 and 600 dollars, but any larger medical procedure can cost an individual several hundred thousand dollars without health insurance. The lack of a pension plan and health benefits is an issue that may not seem that important to workers in the short term, but as the problem becomes more evident, it could adversely impact workers' desire to be part of the gig economy. Without the company providing benefits to its employees, it is easy for the workers to choose to spend the money rather than to save.
The gig economy enables individuals to specialise in key skills, positively impacting the economy. As per Adam Smith's anecdote of the pin factory, the division of labour maximises profit. Therefore, instead of businesses having to rely on a singular employee to carry out the tasks, it can be split into hourly contracts of people who specialise in the precise fields. For example, a startup company may have limited money available to spend on employees, goods and services. The gig economy allows these startups to ration the scarce resources without hiring full-time employees and rather look for specialists to hire hourly. Therefore, if a service becomes redundant, it can seamlessly be given to another contractor for another task. This enables a business to maximise its resources, causing it to be closer to the position shown on the Product Possibility Frontier in the diagram. Therefore, by maximising its resources, a business can have a larger output in a shorter period of time, positively impacting the firm and economy.
However, this division of labour is threatened by the uncertain impact of Artificial Intelligence. Currently, AI can complete tasks such as magazine editing, accounting, and chauffeuring. Currently, most of these tasks are performed by contractors, in other words, the temporary workers of the gig economy. The rapid rise of AI could jeopardise the stability of these workers' income, hence forcing them to change employment paths. However, the future remains uncertain, and all employment sectors could face the risk of termination due to this new technological force.
In conclusion, whilst the gig economy contributes positively to economic growth, its future has many uncertainties. Enabling individuals who are otherwise economically inactive into the economy positively impacts a nation's economic state. Additionally, businesses are able to reduce costs and maximise their spending on specialised individuals for limited tasks. However, AI and social issues, such as wage disparities and lack of benefits and protections, may jeopardise the gig economy's future by making it less desirable for individuals. The nature of this industry exploits many disadvantages, which will bring into question the sustainability and reliability of this economy if it continues to grow. Therefore, I believe that in the long-term, another employment solution needs to be made to sustain companies such as Uber. I believe there should be only a limited number of freelance work available, to force individuals to cooperate into the economy in more permanent and reliable ways, such as 9 to 5 jobs.
Written by Annika Bjerregaard
(2022) Tube driver pay increases by almost £15,000 in ten years, Evening Standard. Available at: https://www.standard.co.uk/news/london/tfl-driver-salary-tube-price-sadiq-khan-uk-cost-of-living-b990478.html (Accessed: 12 December 2023).
(2021a)https://www.chegg.com/homework-help/questions-and-answers/1-consider-fica-payroll-taxes-exist-united-states-taxes-require-employees-pay-employers----q81059342 (Accessed: 13 December 2023).
Person (2023) What is the gig economy and how does it affect your business, Workplace from Meta. Available at: https://en-gb.workplace.com/blog/the-gig-economy (Accessed: 28 December 2023).
Uber announces results for second quarter 2023 (no date) Uber Technologies, Inc. - Uber Announces Results for Second Quarter 2023. Available at: https://investor.uber.com/news-events/news/press-release-details/2023/Uber-Announces-Results-for-Second-Quarter-2023/default.aspx (Accessed: 28 December 2023).
The gig economy has been steadily booming over the last decade. millennials and Gen Zers helped it reach new heights in 2023 (no date) Yahoo! Finance. Available at: https://finance.yahoo.com/news/gig-economy-steadily-booming-over-191559689.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAB6XZ2kGLtrZ_DKetWMkaFlmRiT5a0Icindu8n-0CwKsJJfavxLXcqAkK5Vz5R6KNfuXh6vvnuAFJxSrynp-iqJsJBVd6Kw_sRSw-p6SP2ksxpE3Tq5He7SG1brc29mji5I4XE4vVGs0DU9bC7zlwSoCHZ3hE3CA0bAMVkSQV43n (Accessed: 29 December 2023).
Great Essay Annika!
Great essay Annika!!