The freedom of freelance work

The Future of Work in the Gig Economy

In the modern ‘sharing economy,’ technology has allowed ownership to become increasingly optional, leading many people to become less attached to physical possessions. But technology is also facilitating a more ‘arm’s-length’ relationship with perhaps everyone’s most necessary ‘possession’ – their job. Chris Wright asks whether this could  be the most profound implication of the gig economy – in which workers offer their services to a variety of firms on a freelance basis rather than hooking up with a single employer?

Around the world a host of sites have emerged that match short-term workers to projects., for example, connects over 20 million temporary workers to employers in areas from software development and engineering to writing and legal services. Rival Upwork has 12 million registered freelancers, and 5 million corporate clients. Partly due to the prevalence and ease of using such sites, more than one in three US workers are freelancing, according to the 2nd annual ‘Freelancing in America’ survey. The trend is confirmed by a host of research and surveys; one from Deloitte of 7,000 clients around the world suggesting that over half expect to increase their stock of contingent workers over the coming five years. Professional service companies are now also exploring the gig economy, with PwC, for instance, recently unveiling a “Talent Exchange” program, where it will deploy vetted freelance consultants on specific projects.

The most common reason cited by freelancers for choosing to freelance is to have greater flexibility over their schedule. The benefit of this for companies is clear; it gives them on-demand access to skills and labor without the obligations involved in a fixed contract.  And herein lies the issue. In return for greater freedom, independent workers sacrifice the protection that employers can offer during troubled times, such as economic downturn, when freelance work can dry up.  Perhaps more critically, even in good times, companies are typically unwilling to contribute to the pension plans or the cost of health insurance for freelance workers. Just as the transition from defined-benefit to defined-contribution pension plans shifted risk from employer to employee, the gig economy will further expose individuals to greater financial perils. On average, lower employee costs should improve corporate profit margins. The unintended consequence, however, is that under the current structure a systemic rise of the gig economy may cause a negative feedback loop and slow economic growth further.

When a job was a job for life – or at least for many years – it offered a high level of income security. The resulting stability is generally positive for consumer spending. In contrast people generally respond to a reduction in income security by saving more for a rainy day. China, where there is less of a social security net for healthcare and retirement, is a good proof-point for this. An average household hoards around 40% of their income, primarily for this purpose, much lower than the US and Europe where just 5-6% of income is saved. The saving rate in the US has almost doubled since the global financial crisis, after the realization that the state social safety net was not enough for many, which is clearly a good thing. However, in advanced nations such as the US, where 70% of GDP comes from consumption-related spending, a significantly higher saving rate could prove problematic for the economy as it adjusts to a new paradigm.

Could freelancer unionization help resolve this issue? The Freelancers Union, which now represents 300,000 people in the US, recently announced it would be advising Uber (which employs 35,000 drivers in New York City alone) on how to create a portable benefits solution for its drivers. If successful this would create the protection needed for freelance workers by creating a blueprint for a social security safety net system that could be replicated more broadly across the gig economy, and go some way to mitigate the issues highlighted above.

The same principle applies to freelancer training and education. Currently, these areas tend to be the responsibility of freelancers themselves, rather than their paymasters. However, as employers find it harder to find trained freelance workers, and freelancers experience difficulties in funding their continuing education, might workers be able to persuade companies to help foot the bill? In economies that are strong or flexible enough to grant workers sufficient bargaining power, collective action by freelancers may prove pivotal in terms of removing a key barrier preventing millions more from choosing a freelance existence.

Such changes would likely affect the implications of freelancing on the economy as a whole. With proper benefits in place, freelancing could transform from a steady drag on the consumer economy into a much more cyclical influence. With a growing pool of freelancers in place, employers might hire more rapidly during good times and fire faster during bad. In an environment of declining fixed costs, they would also be in a position to invest more experimentally in their operations. For employers, such a scenario might heighten economic volatility but boost investment from current anemic levels. And for freelancers, could this mean not having to surrender their most important possession but instead swap it for an enhanced form of creative destruction?