Gig Economy Right Fit for Some, Not All

Companies and workers win and lose as this emerging sector of the workforce redefines old practices.

An economy full of on-demand gig workers sounds great—if you are an employer and don't want the financial commitment of paying another employee. A staff job offers the security that most workers need, but most gig workers are less secure. Since being an employee is still desirable for most workers, especially for less skilled workers, there's a push by state governments to turn contractors into employees. Yet it doesn't need to be that way. Instead, we need to restructure America's economic infrastructure to better support gig workers.

Being an employee can (but doesn't always) entitle you to vacation time, health benefits, protection from harassment, disability, and unemployment insurance. It is also much harder to fire an employee than it is to fire a contract worker. California has ruled that Uber drivers are employees and are entitled to those protections and benefits. And now there are reports that other tech firms are putting their contract workers on staff, for legal and economic reasons.

But in some ways, this shift is like trying to shove a square peg into a round hole. It's not clear that the contractors even want to be on staff. Research by Princeton economist Alan Krueger and Uber's Jonathan Hall estimates that most Uber drivers prefer the arrangement because they like the flexibility. There's little evidence that they are Uber contractors because they can't get a regular job; very few drivers were unemployed before they worked for Uber.

And gig workers aren't all the same. The media have made it feel as though contract and contingent workers are taking over the labor force. But there is no consistent data to count their numbers. Self-employment rates don't tell us much about trends in contract work because they capture all kinds of entrepreneurs: family-owned businesses, doctors, plumbers, etc. Many contract workers are moonlighting from their primary jobs.

Contract work is riskier, but that comes with upsides—independence; the potential for more money, even if the pay is more unpredictable; and other long-term benefits. It can teach a broad set of skills, which are more valuable than what you'd learn as an employee at a particular company. In this tech-driven world, it pays to be adaptable, able to communicate with a diverse set of people, and have relationships with many employers instead of relying on only one source of income.

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Despite the upside potential, the concern for contract workers is well-placed because the lack of benefits and security mean more risk. For that reason alone, contractors should be paid more, and sometimes they are. Incorporated, self-employed workers are paid more than salaried employees (unincorporated workers get paid less). The figure below is median earnings for self-employed (an imperfect measure of a contract worker) and salaried employees by education.

The pay disparity across types of self-employment illustrates how diverse contract workers are. Some are temp, on-call, or contract workers. Conditions for the first two types tend to be undesirable, pay worse, and go to people who can't find steady work. But contract work can also be lucrative and many people, normally (but not always) skilled workers, prefer the flexibility and higher pay of contract work. Skilled workers have the means to handle and hedge the risk, where less-skilled workers are more vulnerable.

The pay disparity across types of self-employment illustrates how diverse contract workers are. Some are temp, on-call, or contract workers.

Yet they don't need to be. For example, the tax deduction on employer-provided health insurance means it's cheaper to get health insurance as an employee rather than buy it yourself (assuming you don't qualify for a federal subsidy). Getting rid of these kinds of distortions would go a long way to equalizing compensation between contractors and employees. The government could also support a market for wage insurance to smooth out periods of no or slow work.

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A large share of the downside risk is a relic of outdated labor market institutions that favor regular employment by only conferring benefits to staff employees. Rather than turning an emerging class of natural contract workers into employees, the economy needs more infrastructure to support gig workers. This may include getting rid of preferred tax treatment for benefits provided by employers. It would remove distortions, which skew the market toward regular employment.

Reprinted with the permission of Quartz. The original version can be found here.