Gig Economy: Definition and Pros and Cons

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The term “gig economy” refers to a free market system in which traditional businesses hire independent contractors, freelancers, and short-term workers to perform individual tasks, assignments, or jobs. The term comes from the world of the performing arts in which musicians, comedians, etc. are paid for their individual appearances, called “gigs.” 

Key Takeaways: Gig Economies

  • In the gig economy, businesses hire independent contractors to perform individual jobs, called “gigs.”
  • Hired and assigned via internet and smartphone applications, gig employees work remotely.
  • While contract gig workers enjoy great scheduling flexibility and extra income, they suffer from relatively low pay, lack of benefits, and increased stress. 
  • In 2018, about 57 million Americans—nearly 36% of the total U.S. workforce—were full or part-time gig workers.

While such temporary arrangements offer tremendous advantages, like freedom and flexibility, workers in the rapidly-evolving gig economy are finding they face an increased risk of financial hardship from being totally responsible for their own income and benefits. Much like traditional jobs, gig economy jobs are great—until they’re not.

How the Gig Economy Works

In the “gig economy” or “freelance economy,” gig workers earn all or part of their incomes from short-term contracts under which they are paid for individual tasks, assignments, or jobs. Typified by globally-recognized companies like Uber, and Lyft—which hire people to use their personal vehicles to provide taxi-like, on-demand ride services—gig economy companies use internet and smartphone-based applications to both hire and assign workers.

Each individual gig or assignment usually accounts for only a part of gig worker’s total income. By combining several tasks for different companies, gig workers can realize cumulative earnings equal to those of conventional full-time jobs. For example, some gig workers drive their cars for both Uber and Lyft, along with renting out rooms in their homes through Airbnb. Other people simply use gig jobs to supplement their regular income.

Another aspect of the gig economy involves so-called “digital earning platforms,” like eBay and Etsy, which allow people to earn money by selling their used items or personal creations, and online handyman services, like TaskRabbit.

In many ways, the gig economy reflects and facilitates the desire of millennial generation workers for greater flexibility in balancing their work-life demands, often changing jobs several times during their lifetimes. No matter what motives drive gig workers, the popularity of the internet, with its capability for remote work, has caused the gig economy to thrive.

How Big is the Gig Economy?

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SAN FRANCISCO, CA - A Lyft customer gets into a car on January 21, 2014 in San Francisco, California. As ridesharing services like Lyft, Uber and Sidecar become more popular, the San Francisco Cab Driver Association is reporting that nearly one third of San Francisco's licensed taxi drivers have stopped driving taxis and have started to drive for the ridesharing services. Justin Sullivan / Getty Images

According to a Gallup Workplace report, 36% of all U.S. workers were gig workers during 2018. “Gallup estimates that 29% of all workers in the U.S. have an alternative work arrangement as their primary job. This includes a quarter of all full-time workers (24%) and half of all part-time workers (49%). Including multiple job holders, 36% have a gig work arrangement in some capacity,” states the report.

Those percentages mean that about 57 million Americans had one or more gig jobs.

The U.S. Bureau of Economic Analysis (BEA) estimates that combined digital economy grew by an average of 5.6% per year from 2006 to 2016 compared to 1.5% growth in the overall economy. Perhaps even more eye-opening, the BEA reported that the digital economy supports about 6 million jobs, or 4% of total US employment, “similar to industries like finance and insurance, wholesale trade, and transportation and warehousing.”

And as big as the gig economy is now, the Pew Research Center predicts it will growth even faster as more people become familiar with using mobile devices to arrange for personal services and to buy and sell products. According to online technology magazine Digital Trends, at least 6.1 billion people (70% of the world’s population) will have a smartphone by the end of 2020, a drastic increase from, 2.6 billion smartphone users in 2014.

Pros and Cons for Gig Workers

For employers, the gig economy is mostly a win-win proposition. Businesses are able to quickly contract with experts for individual projects without the overhead costs like office space, training, and benefits. For freelancing gig workers, however, it can be a mixed bag of pros and cons.

Advantages of Gig Work

  • Flexibility: Unlike traditional employees, gig workers are free to choose what types of jobs they do and when and where they do them. The ability to work from home helps in balancing work and family schedules and demands. 
  • Independence: For people who like to be left alone while they complete an assignment, gig work is ideal. Not hindered by traditional office interruptions like staff meetings, progress reviews, and water cooler gossip sessions, gig economy workers are typically given almost unlimited independence to do their work when and how they think it should be done.
  • Variety: The old office bug-a-boo of monotony is rare in gig work. A wide variety of tasks and clients every day keeps the work interesting, helping gig workers be more enthusiastic and creative in their work. Never a dull day in gig work—unless you want one.

Disadvantages of Gig Work

  • Modest Pay: While they can make as much as $15,000 a year, a study by online lender Earnest found that about 85% of gig workers make less than $500 a month from a single side-job. The solution, of course, is to take on multiple gigs.
  • No Benefits: Very few gig jobs come with any sort of health or retirement benefits. While some long-term contracts may come with limited benefit packages, even this is rare.
  • Taxes and Expenses: Since contract gig workers are not legally classified as “employees,” their employers do not withhold income tax or Social Security taxes from their paychecks. As a result, gig workers must make quarterly estimated tax payments to the IRS based on what they have earned. Most freelance and gig workers find the need to pay from 25% to 30% of each of their paychecks in order to avoid owing taxes at filing time. In addition, most gig workers are responsible for buying their own work-related equipment like cars, computers, and smartphones. While some of these expenses can be deducted from taxes, not all can be. Many gig workers find they must also factor in the cost of accountants or tax preparation services or software.
  • Stress: All of the above, along with the need to constantly be looking for their next gig and dealing with changes in their current contract can make for increased stress—an undesirable tradeoff to the greater flexibility of gig work.

The Gig Economy and Consumer Safety

While the growth of the digital economy shows that consumers relish and demand the convenience, choice, and potential cost savings of gig services and sales, the gig economy also poses a threat to public safety.

Due to the remote hiring processes involved, gig workers sometimes do skilled jobs with little or no training or prior experience. For example, passengers of online ridesharing services are often unaware of their driver’s skill level, driver’s license status, or criminal background.

In addition, gig drivers are not subject to the same U.S. Department of Transportation consecutive driving hours limitations imposed on traditional commercial drivers. While some online ride services now lock out their drivers after certain number of hours behind the wheel, drivers often work for more than one service and simply switch back-and-forth, thus allowing them to drive for extended hours.

In the realm of gig sales and rentals, the old adage of “buyer beware” rings particularly true. Products are often sold without warranties or guarantees of quality or authenticity, and rental properties may not be as desirable as they appear on the service’s website.

Sources

  • McFeely, Shane, and Pendell, Ryan. “What Workplace Leaders Can Learn From the Real Gig Economy.” Gallup Workplace (August 16, 2018).
  • Defining and Measuring the Digital Economy.” U.S. Bureau of Economic Analysis (March 15, 2018).
  • Smith, Aaron. “Gig Work, Online Selling and Home Sharing.” Pew Research (November 2017).
  • Bloom, Ester. "Here's how much money Americans are making from the gig economy." CNBC (June 20, 2017).
  • Boxall, Andy. “Number of smartphone users in the world is expected to reach a giant 6.1 billion by 2020.” Digital Trends (October 3, 2015).
  • "The pros and cons of the gig economy." Western Governors University (August 31, 2018).
  • Medina, Andje M. and Peters, Craig M. "How the Gig Economy Hurts Workers and Consumers." Entrepreneur Magazine (July 25, 2017).