The case for the gig economy: better organisation, easier taxation and an open labour market

Eva Forslund // 06.09.2016

 

Uber, Airbnb, and BlaBlaCar – the sharing economy is, although still controversial, well established in Europe. So much so that the EU Commission released guidance and recommendations for the member states on how to address and regulate it  on June 2. The Commission stated that the sharing economy has great potential and that regulation should not stifle it. The idea behind the sharing economy is simple: our resources can be better used if we share them and digital platforms have revolutionised sharing resources such as home, case, or food with strangers through a peer-to-peer system. Now, we are seeing the rise of the sharing economy’s cousin, ‘the gig economy’.

 

The gig economy is sometimes considered a part of the sharing economy: through digital platforms, people can more efficiently share one specific resource: their time. In a fully-fledged gig economy, no one is employed. Instead, everyone works as a fixed-term freelancer – in gigs. This phenomenon is not new – just think about all the babysitter ads that people used to put up in the local grocery store, or of the musicians that always have worked in gigs.

 

What is new, however, are the apps such as TaskRabbit or the Swedish app JustArrivd that gather available work and make them easily accessible for those seeking work. The recent digitalisation has allowed the gig economy to grow in a way not previously possible. Only in the UK, there has been a dramatic rise in this type of work – 4.5 million British residents are now self-employed. The gig economy is expected to grow even more and will determine what the labour market looks like and how it functions in the future.

 

As is the case with everything new, the gig economy is facing criticism.

 

High profile figures, such as U.S. Presidential candidate Hillary Clinton and former U.S. Labour Secretary Robert Rich, fear that the gig economy will lead to a decrease in job security. This fear is based on the idea that when more people’s main income comes from shorter, time-limited projects, fewer companies will want to offer tenure or secure employment. This will result in an insecure labour market.

 

What is here wrong is the assumption that the labour market will automatically grow vulnerable as a consequence of the gig economy. To understand this, one must first understand the nature of firms.

 

According to Nobel Prize winning economist Ronald Coase, firms are formed with central planning, a hierarchal structure, and safe employment to reduce transaction costs. Traditionally, finding the right person for the right position requires a lot of time and resources and employing someone new is a long-term investment. It is better for firms to spend time screening suitable workers because the costs of high turnover are greater.

 

Times have changed. New technologies enable us to find the right person for a job with just the push of a button. An employer no longer needs to commit extensive resources to the search process. With the gig economy, an employee is not as much of a long-term investment for a single firm, and firms are not pressured to hold on to that person.

 

Therefore, it is likely that the very structure of firms will change. If this is the case, job security will no longer translate to working at a particular place for two, ten, or thirty years. This will not mean that the labour market will become less secure. Instead, the meaning of job security will change, emphasising a steady stream of work opportunities and flexible schedules, instead of an attachment to a single employer.

 

As Matthew Sinclair has argued, in the gig economy, workers will have more options: losing a job will therefore not be as bad of a financial hit as it is today. The labour market is likely to change, both short and long term, but it will also provide a number of new opportunities.

 

Another concern with the emergence of the gig economy is that it is hard to tax. This is understandable at first: if every worker is a contractor, everyone will also have to pay taxes themselves. Figuring out how to pay taxes for every freelance job one does, regardless of how small, takes a lot of work. This in itself is not an argument against the gig economy – it is an argument for tax reform. When the economic system and society as a whole is changing, we have to adapt the tax system to the new economic environment, not the other way around. Paying taxes needs to be easier. In this regard, the gig economy has considerable potential. First of all, because of the digital nature of these new services, taxes could be deducted directly – simply by a touch on the screen. Further, since every transaction is digital, each one leaves a trace, making tax fraud difficult.

 

A key reason why we should welcome the gig economy is that it opens up the job market for outsiders.

 

Both the sharing economy’s and gig economy’s purpose is to better utilise available resources. Unlike the gig economy, you need assets such as cars or houses to earn an income in the sharing economy. The only thing you need to be part of the gig economy is time. The main beneficiaries of the gig economy will be people who have an abundance of unutilised time. These people are outsiders in the job market – such as the long-time unemployed, young, or newly arrived immigrants. With new apps and technology these people can – with very low transaction costs – very easily connect to potential employers.

 

The future of the gig economy will depend on how it is welcomed in the EU member states. As the European Parliamentary Research Service wrote in a study, Member State regulations on the sharing and gig economy differ largely from each other. The challenge for the EU is to streamline these regulations, to ensure a functioning digital single market. The overwhelming risk is that the countries’ that favour strict and rash regulation will get too much influence. In light of this, the EU Commission’s protection of the sharing economy provides reason to be hopeful. There is no doubt that regulation and tax reform are likely to affect the gig economy, but it is important that such legislation does not disrupt the gig economy’s potentially transformative impact on the labour market.

 

Up until now, the labour market was organised based on the transaction costs associated with finding new employees. Digitalisation, however, has radically reduced these transaction costs. Taxation of the new labour market may initially be tricky, but potentially very effective. Most importantly, the emerging gig economy offers an opportunity for society to better employ a most important resource: its people’s time.

 

Eva Forslund is a Research Assistant at EPICENTER.

 

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).