GIG ECONOMY

By David Schoenwerth

August 30, 2020

“The gig economy is empowerment. This new business paradigm empowers individuals to better shape their own destiny and leverage their existing assets to their benefit” (McAfee, 2016). It was with from perspective of individual autonomy and liberalism that McAfee described the mere potential of the gig economy. Others cynically call it “flexibility fetishism” (Kaminska, 2019) at the disadvantage of the so-called gig-workers whose social destiny would not be all rosy and full of benefits after all. That rings a bell of the genesis of workers unions. Some go beyond gig-economy and predict the broader rise of some sort of universal basic income (Jones, 2020) – helicopter money.

The perks of the gig-economy are evident: gig-workers can schedule their work at their own disposition, full-time or occasionally. Gig-platforms bring together several groups to craft an efficient service-delivery system while heavily relying on digital technology. Customer groups, such as providers of goods or consumers, experience lower transaction cost.

At the same time, prominent issues at place at quite a few gig-platforms include privacy, labor protection, consumer protection, tax compliance, and ensuring a level playing field (Frenken et al., 2019).

In the following five points, I will illustrate these identified issues based on their compelling 2019 study, analyze them from a lens of economic externalities, and give a few solutions. Finally, I sketch the messy world of Collective Action. Positive or here rather negative externalities are present when a price does not reflect the true cost of producing goods or providing services, but these costs are paid by others.

Privacy

In terms of consumer and employee privacy, we observe a tendency of gig-platforms to gather and analyze a sizeable amount of personal data to optimize their operations. Understanding customer preferences and behavior enables more intuitive smartphone apps, faster available deliveries, or more contextual information like ratings on restaurants. Regarding gig-workers’ privacy, data on their performance, speed, availability, smartphone behavior, or their received customer ratings are on the table.

Information in a people-business often comes at the expense of privacy. The latter can be considered externalizing the cost of information. Still, the question here is thus not if we need either information or privacy, but how to combine anonymization technology, proper enforcement and valid, freely given consent of the data subject. (Note: an excellent piece on the privacy paradox touching Collective Action Theory by Solove (2013)).

Labor protection

The degree of labor flexibility offers a better fit of supply planning and demand – when and where are how many gig-workers needed? By flexibly paying gig-workers per delivery or per time-period, salary only must be paid if there is work for them. It also means that a considerable degree of business risk is externalized to gig-workers. Similarly, by relying on those ‘independent’ workers, social security, and pension savings, if any, are paid for mainly by the gig-worker, decreasing fixed cost for gig economy firms. The same applies to sick leave and holidays whose cost is externalized – gig-workers are usually paid only for the hours they work.

In short, as we do have regulatory blueprints to stop this, we need to make proper employment contracts mandatory if gig-work surpasses a certain weekly threshold.

Tax compliance

The question of adequate also exists in other sectors where multinationals leverage loopholes in the global tax landscape. While highly relevant, it is considerably less of a problem specific to the gig-economy (more on this issue in Kinder & Agyemang, (2020)). Regarding gig-workers’ income, tax regimes can offer difficulties for ‘independent’ workers, e.g. which of their expenses are gig-related, which are personal (Watson, 2019)? On a higher level, are different rates of taxation and administrative burdens (Berry-Johnson, 2020) justified?

The efforts needed to actually improve taxation systems here are shifted from tax authorities to gig-workers, making them assemble available information into sophisticated forms (Estonia is an example to look at in CEF Digital (n.d.)). While some administrative burdens are externalized to gig-workers, a sustainable solution is to simplify tax systems by integrating payroll systems with tax authorities and moving a global taxation framework forward.

Consumer protection

Safety measures such as background checks, education programs, knowledge checks, working hours policies or regular check-ups are not always required or, if so, properly enforced. While they create trust and safety for everybody, paying for such procedures is transferred to gig-workers or customers who do not necessarily take all these factors into account but still bear the externalized potential cost. Here as well, there already exists a diverse toolkit to ensure workplace and consumer safety that needs to be put in place, though more agile and open to change than it often is now.

Level playing field

Gig-platforms may have inherent advantages towards incumbent businesses in their industry. Some of them are legitimate technological innovation and should be considered well-earned. Others again results from blatantly circumventing the regulatory framework and growing immensely in size before industry regulatory action kicks-in. In this case, the rules of the game are disregarded.

Like above, agile and open regulatory frameworks are highly necessary to balance the speedy innovativeness of new competitors with the risk of industry fatigue in a highly regulated environment. As we have now made our way through five problematic pillars, it is time to bring it all together. 

Diagnosis and way forward

There are not only plenty of issues. There are also plenty of existing approaches to balancing interests of businesses and individuals. Now, why have they not been implemented?

Some might say there is a lack of ownership and responsibility by gig-workers and consumers. They could ultimately vote with their feet and choose not to interact on the platform. If they do it anyway, they probably accept those conditions. Here, we come back to negative externalities which are not sufficiently reflected in the pricing and conduct of many gig-platforms.

There is a simple explanation for what we observe: the so-called Logic of Collective Action (Wikipedia, 2020). The more one is invested in a certain issue, the more one chooses to actively campaign and lobby for it, such as gig-platforms finding ways to leapfrogging existing sectoral regulation. While consumers might not even be aware of the existing issues, both consumers and gig-workers struggle to publicly voice their interests, to organize (e.g. due to technology) and finally achieve regulatory change. One possible cause is the free-riding problem: “It won’t make much of a difference if I participate or not” (much more on this in Hardin (2013)).

Economic activity can increase welfare for everybody by both innovating and reducing inefficiencies. What we need to figure out is which externalities we want to accept and who, but the most vulnerable people of our society, pays for them to make economic growth more sustainable for everybody. If we empower existing and new advocacy groups to make a difference and better reach and represent gig-workers, we can find a viable compromise for these issues.