The gig economy will continue to make life better – if we let it

Non-traditional work arrangements, and whether they represent a force for good or bad, have been a perennial subject of debate and study, but their growth is both undeniable and unstoppable. The gig economy is not new, but technology has enabled it to extend far beyond what a barber who moonlighted as a book dealer in 18th-century Manchester could ever have imagined.

A study last year found that around 1.1 million people in the UK are considered gig economy workers (though I suspect this figure is modest). Individuals are driving their own destinies, and the list of companies turning to contractors is fast expanding.

Earlier this month, Linklaters and Clifford Chance joined Allen and Overy in setting up networks of self-employed lawyers to provide to clients on a flexible basis. Traditional firms are now adopting revolutionary practices, significantly reducing their fixed costs (long-term contracts and employee secondments), while having the option to mobilise groups of highly-skilled workers quickly on bespoke projects.

For contractors, the upsides are plenty. First, finding work has never been easier. Second, gigging provides flexibility: new mothers can use it as a stepping stone back into the workplace, students as a convenient way to earn extra money, and others as a stopgap between roles. Third, it smooths out rough patches in the traditional labour market, making up for dips in conventional earnings.

In short, the gig economy is not a temporary response to high unemployment or bad economic conditions. It is a win-win-win for consumers, workers, and companies, and is largely to thank for the UK’s record high levels of employment.

Nonetheless, the outcry over worker rights in the gig economy has reasonable justifications, and some government regulation will be needed to ensure workers are not exploited. Are Uber drivers employees independent contractors, entrepreneurs, or something else?

One thing is clear: they are increasingly clubbing together to demand that platforms offer workers’ rights, not through union, as they’re not yet classified as employees, but through the courts. Ride-hailing companies are falling over themselves to proclaim they treat their drivers well (in part to attract new workers). And earlier this year, Hermes announced it would be offering guaranteed minimum wages and holiday pay to its drivers – the first such offer in the industry.

We can only hope that others do not feel pressured to follow suit: not only do minimum wages hit smaller firms (those that might seek to rival the likes of Uber) hardest, but they create perverse incentives and may increase costs for consumers, which will lead to decreased demand and a drop in driver earnings. While in-work poverty and the exploitation of workers are unacceptable in modern-day Britain, regulation will need to be more imaginative than the government’s informally-labelled “Good Work Plan“.

Let us not forget that many gig workers favour flexibility over employer-provided benefits. Extensive polling commissioned by Uber, for example, found that five in six prefer the flexibility of being self-employed to the possibility of employee perks.

There are tax advantages to being self-employed that the government will need to be bold in addressing: the Institute for Fiscal Studies worked out that they amount to an average of £1,240 per year. There is simply no good justification for this. And, as is the case for Uber drivers who can simultaneously drive for Lyft, workers must have the flexibility to work for more than one platform.

The gig economy may have implications stretching far beyond traditional employment, which come directly out of Ronald Coase’s work on transaction cost economics. Coase investigated a paradox: markets are better than central planning, but every firm was itself an island of central planning. In 20th-century Britain, the standard type of worker was a full-time permanent employee, not a freelancer.

As Coase argued, this made sense: it was cheaper for firms to hire full-time staff than to negotiate and enforce a new contract on the open market for every job that needed doing. Gig economy platforms cut transaction costs and make it possible for firms to “rent” workers for specific tasks. If technology continues to reduce transaction costs, we could see a radically decentralised economy.

It will be Schumpeter’s entrepreneurs who are the dynamic agents of change. Picture this: a group of lawyers, each with a set of specialised skills, brought together for a project. Once completed, they break up, only to later reform in myriad combinations of solicitors and deals. Worker productivity soars. Fixed costs plummet. The firm of the future could operate primarily as a software platform rather than as a physical location.

As firm sizes diminish, so too will the volume of “stuff” we own. Professor Michael Munger of Duke University writes: “entrepreneurs will create, and capture, value by reducing the transactions costs of sharing existing commodities”. The execution and implications of doing so are impossible to predict with any real certainty, but what is clear is that corporate regulation and worker welfare issues must be dealt with by the government without threatening the benefits of the gig economy.

Written by Annabel Denham

Annabel Denham is Communications Director at The Entrepreneurs Network.