The gig (economy) is up!

The “sharing” or “gig” economy is here. Lots of substantial, rigorous research on this topic? Not here yet. The gig economy highlights some emerging economic trends: changes in the nature of work, firm structure and formation, production, and consumption.

Today I’ll discuss an analytical framework on how institutions, entrepreneurship, and public policy affect (and are affected by) the emergence of the gig economy.

The opportunities for entrepreneurship will change in currently unknown ways as the gig economy grows alongside changes in Information and Communications Technology (ICT). While technological change will provide new arenas for entrepreneurship, it also has the potential to close current opportunities for entrepreneurship that exist.

Fitting the gig economy into economic theory

In his influential 1937 paper, “The Nature of the Firm”, Ronald Coase conceptually identifies the conditions that determine the existence, structure, and size of firms. Coase identifies transaction costs as a key determinant in the size and existence of firms. Using this framework, the growth of the gig economy can be evaluated in context of technological advances, which lowers transaction costs. This has a polarizing effect on firm structure.

The gig economy is not new, but technology has definitely expanded its impact. First, these technological advances (cell phones, cloud computing, mobile payments, etc.) increase firm size by reducing the costs of organizing transactions across space. Coase states, “Inventions which tend to bring factors of production nearer together, by lessening spatial distribution, tend to increase the size of the firm.” Second, decreased transaction costs from technological innovation as found in the gig economy allows entrepreneurs and contract workers to minimize search, information, and bargaining costs.

As an example, Uber provides a framework that minimizes the non-monetary costs associated with a service (searching, trust, negotiation) that is typically found in large firms, but is structured as a collective of independent contractors. It’s as if it operates in an open market with no firms (all services provided by entrepreneur/individual as single transactions for service).

But are Uber drivers employees, independent contractors, entrepreneurs, or something else? It would depend on how we define those terms since a strong case could be made for any of those classifications. There are far-reaching ramifications for the legal labor status for these workers currently being decided in the courts. This legal status affects tax responsibilities, employee/employer responsibilities, customer liability, and insurance among other worker rights and protections. As a result, some have suggested a new worker classification, independent worker, is needed to ensure the proper labor market protections.

Lumpiness

Which industries are most susceptible to gig economy firm structures? Or to put it more plainly, why do we have Uber and Airbnb disrupting the traditional taxi and hotel industries?

Lumpiness.

What?

In this context, lumpiness refers to the fact that the gig economy takes advantage of goods that we have to purchase at a larger scale than we can use. As an example, if you buy a car, you own that car 24 hours a day, but it rests idle most of the time. You can’t buy and own a car for only the one or two hours a day you actually use it (though obviously you could rent one daily with something like ZipCar). So Uber takes advantage of the fact that you when you buy a car, you own far more capacity than you actually will use. So, if you’re willing to put forth some time and maintenance costs, you can make money on the excess capacity that you have.

Monopoly or oligopoly power

One other thing to keep in mind is that platforms like Uber only work well if there are very few competitors because they rely on the network effect. This is very similar to the way that social media platforms are almost useless until you have a critical mass of users generating content. Facebook is no fun if you have no friends on Facebook.

If you don’t count the workers in the gig economy as entrepreneurs, the gig economy could be viewed as pretty hostile to entrepreneurship. When you land an airport and want a ride, you don’t want to have 40 different apps with two drivers each; you’d much rather have two apps that have 40 drivers each. In order to provide value for the consumer and the worker, the platform must scale large enough to have few alternatives. This makes later entry into the space by a startup particularly hard. Perhaps this can partially explain the sky high valuations for Uber and Airbnb without profit margins to match.

The future of the gig economy is unknown, but the incredibly quick growth of gig economy firms should have our full attention… even as we struggle to determine exactly what the gig economy is and who is a part of it.