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The Independent Contractor and Entrepreneurship in Labor Markets

Jobs aregranulized and parceled out in discrete packets to workers across the globe - the common factors are an Internet connection, execution at a distance and output provided on-demand by people who are not employees but independent workers. The online platform for trading goods and services is the on-demand economy, while only services are traded on the online gig economy.

Abstract Empowerment of workers and degree of control are central themes in the workplace. The shift of workers from employee status to independent contractors is accompanied by more control. Employees typically have job security and multiple benefits, but limited freedom over terms of the work. Contractors are at the other end of the spectrum of control, with the ability to tailor their work environment but face the risk of disruptive forces. Jobs are parceled out in discrete packets to workers around the globe, requiring only an Internet connection and execution, while at a distance, is on-demand. As independent contractors, workers own their skill set and, therefore, have incentives, and opportunity, to reconfigure skills using the Internet in online education.

Keywords Young and small firms • Independent workers (IW) • Gig economy • Peer-to-peer (P2P) markets • Productivity

© The Author(s) 2017 57

S. Bhatt, How Digital Communication Technology Shapes Markets,

Palgrave Advances in the Economics of Innovation and Technology,

DOI 10.1007/978-3-319-47250-8_4

More people in the US work for older and larger firms. The entrepreneurial sector is not driving overall employment in the US. Global economic shocks are better managed by large, multinational firms who have access to advanced DCT, so the decline in entrepreneurship can be attributed to small firms’ inability to capitalize on technology [36]. As we saw in Chap. 3, the share of total US employment of young firms, their share of new jobs and the average real earnings of workers in these firms, in nominal terms as well as relative to mature firms, has been falling, dampening business dynamism [37]. The fraction of firms older than sixteen years grew from 1993 to 2011, while the share of firms in all other age groups declined. Further, over the 1978-2011 period, among these older firms, “firms at each size category below 100 employees saw their shares of total employment fall” [28].1

The employment picture in US labor markets does not reflect the exuberance in technology-dominated markets. The US unemployment rate, measured as the usually reported civilian unemployment rate, plus all marginally attached workers plus total employed part time for economic reasons, stands at 9.7 % as of June 3, 2016, while the civilian unemployment rate by itself stands at 4.7 %.2 In the last six years, the ratio of job openings in the information sector to total non-farm job openings has showed a gradual decline from January 2008 (0.0199) to July 2015 (0.0183) [44]. The most recent ratio in June 2016 was 0.0123. More broadly, the expectation that the storm of new devices would generate information-related jobs was unmet: the ratio was 0.038 in June 2007 when the iPhone was released and fell to 0.0199 six months later in January 2008. Similarly, in March 2010 when the iPad was released, the ratio was 0.0188 and rose only slightly to 0.0198 six months later.3 Employment in the tech sector has not matched the economic possibilities suggested by the introduction of smartphones. Where are all the startups?

These numbers, I believe, misrepresent the underlying fundamentals. The gradual decline in the ratio of job openings in information relative to total job openings from 2008 to 2015 and the fact that the share of young firms and their share ofeconomic activity are declining are not a symptom of slowing innovative economic activity. The structure of the labor market has changed dramatically in recent years with a trend toward increasing granularity in products and services (caused by mobile digital technology), a shift in economic power from large institutions to individuals as a proliferation of firms is “owned” by consumers. The latter development has blurred the distinction between supplier and buyer since supplier Y and buyer X in one market may interact as buyer Y and supplier X in another.

These changes are unlikely to be clearly represented in the data, even after accounting for a sectoral shift from manufacturing to services, for four reasons.4 First, recent legislative action is bringing more flexibility and ownership to potential entrepreneurs, who were previously hampered by financial constraints. Regulation A of the JOBS Act of 2012 reduced financing constraints by enabling firms to raise up to $50 million in equity without being hindered by regulatory approval from the SEC. Second, as discussed in Chap. 3, seed financing, which empowers new firms, is on the rise. Third, labor market frictions in the form of search costs, which had been lower for the corporate sector relative to the entrepreneurial sector, are more likely equalized and lower overall for both sectors due to digitization.5 And fourth, reduction in transactions costs ignites far-reaching structural changes in labor markets.

The fourth reason is most significant in understanding the labor market implications of granularity. But first we need to describe the kinds of products and services that are amenable to a granular market design and organization. Products that can be fine-tuned or differentiated are more amenable to granularity than the standard commoditized product that scales easily, and therefore is supplied by large corporations. BD is the power behind increased product differentiation. It allows firms to assess consumers at an individual level and correspondingly cater to an infinite variety of tastes, leading to long-tailed markets, as described in Chap. 3. These firms are more likely to be small, in terms of number of employees, making them organizationally nimble in order to adjust to changing and increasingly diverse consumer tastes. Einav and Levin explain that these “peer-to-peer” markets or “market-place businesses” arise due to “variability or diversity in demand, the absence of scale economies in production and of course the existence of well-functioning spot markets to match buyers and sellers effectively” at prices that equalize supply with demand [45]. While digital technology aides in the matching and price discovery functions of markets, powerful reputation effects via user feedback provide the bedrock of trust that enable these P2P markets to function in the first place.

Granularity in product markets translates to granularity in labor markets, as in the Uber model. The Uber model induces underlying structural changes in labor markets. Subsequent to the industrial revolution, work for most individuals was done in relation to a larger institution. These workers, called employees, had a fixed contract that defined hours of work, specified the materials they worked with and provided social security and unemployment insurance. Their contract provided stability in income and work environment while limiting their independence. In the last several decades, this broad social contract and the underlying notions of work associated with it have been dismantled.

Granularity in the supply of labor is manifested in the form of flexibility and ownership. Thus, workers, now called independent contractors, can supply labor in flexible amounts rather than in discrete units.6 As independent contractors (IC) they “own” their labor or skill-set and can rent it out in discrete amounts. This new labor market development has enlarged the realm of entrepreneurs and small business owners, who formerly were a much smaller slice of the workforce. The gig economy, for example, is characterized by an online platform where people trade services while the on-demand or sharing economy refers to online trade of products and services. Time sensitivity is conveyed by the term “on-demand,” which is appropriate since digital connections makes these transactions practically instantaneous.7

Workers are now being classified into three possible categories: employees, independent contractors (IC) and independent workers (IW), according to Harris and Krueger [47]. Employee status confers long-term employment but no control over the hours worked or other aspects of the work environment. IC choose when and where to work, and in many instances, also with whom and how. Uber drivers, for example, can choose when and where to work, but not what to charge and whom to drive. The IW category is the new proposed category by Harris and Krueger, who ask whether Uber drivers, who are between clients are “engaged to wait” and should be compensated as IW for that time, or are “waiting to be engaged” and therefore IC. If employees have little control over their work description and IC have complete control, then the IW category is one where the platform “retains some control over the way IW perform their work, such as by setting their fees or fee caps, and they may fire workers by prohibiting them from using their service” [47]. Then IW could have the protections that employees have such as unions, civil rights protections, tax status and insurance pooling.

While there have been flexible work arrangements in the past, the new model makes flexibility more permanent and mainstream. Flexibility does not mean temporary work, performed while looking for another full-time job, working at another permanent job or pursuing another temporary activity such as parenting or studying. Granularity or flexibility is a permanent option! For example, matching recent innovations in ground transportation, an Uber-equivalent for air transport, with smaller operators flying smaller planes to smaller airports is being introduced in the gray charter market. This is the market for airplane ride sharing, in which, business aircraft owners let friends rent their airplanes for flights. “Most US-based charter companies no longer own their fleets. Rather, they manage them for owners looking to generate revenue by chartering out their aircraft - much like time-sharing a vacation house you use only on weekends” [48].8

This contract labor market is growing rapidly. Upwork, an online platform for the digital labor market, lists over 2 million businesses with 2500 skills and has over 8 million workers or “freelancers” from 180 countries. They call themselves “digital nomads” and combine work and travel [48]. Some platforms link companies with specific skill sets, such as MBA & Company which links companies with consultants, Topcoder links companies with computer programmers and Upcounsel links companies with lawyers. The long-tail phenomenon is apparent in these markets - Adam Smith’s specialization idea has been taken to its logical point in the digital world. Businesses can find special workers to satisfy their particular requirement and specialized workers can find a business that fits their skill-set. Economic data from the Federal Reserve (FRED), show that the employment level of self-employed workers, across all industries, stood at $9.68 million in June 2016, shy of its fifty-year peak of $10.9 million in April 2005 compared with a low of $7.1 millionin June 1967 [49]. Inpastyears, self-employment and part-time work was an involuntary choice necessitated by a weak labor market, but today this may no longer be true, as more workers are becoming part of the granular labor market.

There remain two issues that could possibly become roadblocks to the further growth of this contract labor market. One, the IC system might come under regulatory questioning, as suggested by recent developments in the California courts, where former Uber driver-partners are suing the company for lost income. The question is whether the contractor job is considered a temporary “rental” of services or a permanent job with regular employee status. And two, granular markets are faced with the unique problem of allocation of overhead or fixed costs of operation. In typical labor markets, the “firm” that employed labor would bear all fixed costs of operation. These include certification, insurance, financing and taxes. In the case of gray market airplane charters, the operators need to have valid certification from the FAA to maintain insurance coverage on the aircraft and the terms of loan financing. Not only are the owners subject to penalties from the FAA, but the flight crews could have their licenses suspended or revoked.

Harris and Krueger note that basically, workers in this gig economy are at risk from being excluded from a social compact that “represents a synthesis between the desire to enhance the efficiency of the operation of the labor market and to ensure that workers are treated fairly” [47]. There is increased uncertainty in costs and revenues for both the worker and the platform, due to possible litigation or government oversight. Regulatory disparities between labor laws and tax laws exacerbate this uncertainty, and insurance- and unemployment-related protections may be costly since there is no institutional pooling of risk as in company insurance plans.

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