What does the gig economy mean for workers and society?

For young people with good health, occasional workers and those with unique talents, the gig economy has much to offer. Surprisingly, it is those outside it who could end up worse off.

The world of work is in flux. In recent years, apocalyptic headlines have flagged up the advent of new platform business models such as Uber and Deliveroo, which doomsayers claim spell the end of holiday and sick pay, pensions and job stability. However, across the EU, a series of court cases have sought to clarify the responsibilities of gig economy companies and whether or not people who work for them are self-employed or employees. A pushback is underway.

To date, most cases have been settled in favour of workers. For instance, in January a French court defined the relationship between Uber and its drivers as a 'work contract' for the first time in the country. In the Netherlands, a labour union case against Deliveroo about the right to a contract was ruled in favour of the union (although confusingly in another case a Deliveroo rider who wanted to be recognised as an employee was denied that right).

In the UK, judges have ruled that companies such as Uber are wrong to classify workers as self-employed and that they are owed basic employment rights such as the minimum wage and holiday pay. Some unions have even begun to negotiate with gig economy companies, such as parcel delivery firm Hermes: its 15,000 UK couriers can now choose to remain self-employed, or opt for a new ''self-employed plus' status, which offers union representation, minimum wage guarantees and holiday pay.

Workers’ rights?

The narrative described above seems straightforward. Unscrupulous employers design fiendish plans to evade their responsibilities and get employees on the cheap. But is it possible that the so-called gig economy, where employees work without contracts, is actually an attractive option for many people who prioritise flexibility and perhaps don’t have a comprehensive CV? Despite courts across the EU opening up the possibility of paid contracts, might some workers prefer to keep the status quo?

Marieke Blom, chief economist at ING, believes so. “Each EU country has different regulations, but in the Netherlands there is strong evidence that many workers in the gig economy, such as Uber drivers or Deliveroo riders, welcome their self-employed status, not least because of the significantly reduced social security, tax and pension contribution burden,” she says. “The demographic that typically works in these jobs is young, fit, healthy single men. They perceive the risks of being sick, unemployed or old as too remote to make sacrifices to their current pay cheque.”

Blom says that other people appreciate the flexibility of gig economy work – they are able to clock on for just a few hours a day when it suits them. “And for others, the low barriers to work are an attraction: they may have found it difficult to find a job in the past,” she adds.

The attraction of self-employment could result in the number of self-employed in the Netherlands increasing rapidly in the coming years given the ability of technological platforms to reach a wide audience. “In the past, the transaction costs to become a taxi driver for example, were quite high,” she says. “Now it’s very simple to find work via a platform – increased transparency has massively lowered transaction costs.”

Nor are platform models and the gig economy necessarily just a route to work for those with limited skills or little appeal to the mainstream job market. “Platforms also provide a window onto individuals’ unique talents,” says Blom. “If you have a particular skill, it may be hard to get the right compensation. But sites like create a way for those with scarce talents to publicise them widely and auction them off to the highest bidder. From an economic perspective, if platforms become a more significant component of the jobs market, productivity could increase if they enable the right people to find appropriate jobs.”

Problems remain

While platforms may in theory be an effective way of allocating employment, that assumes that the algorithms used by them are fair and in line with the needs of both workers and society as a whole.

“Because the algorithms are operated by privately-run companies, there is limited scrutiny of how they work,” says Blom. “There has recently been controversy about how jobs are allocated to some Uber drivers, for instance. Drivers get more gigs if they have been on the road the longest. From the company’s perspective, that might make sense as these drivers are the most successful. However, for society it has unattractive consequences such as increased accident rates. Similarly, Deliveroo riders earn more if they do three deliveries within a one and a half-hour window, which may encourage some riders to take risks.” In order to address such challenges, Amsterdam wants insights into the algorithms of any significant gig economy player that operates within the city.

The teething troubles described above are likely to be addressed in the future as gig economy companies compromise with authorities in order to continue to operate. However, the growth of platforms and the gig economy raises other, more fundamental questions, according to Blom.

“The downside of these arrangements may not be so relevant for the gig workers themselves,” she explains. “With low unemployment, platforms may increasingly attract workers who do not expect to run any of the risks the social system would normally insure, and also those with scarce talents that can command a price premium. Those individuals on regular work contracts might increasingly be people who need the insurance of the social system, because they run a higher risk, such as illness or unemployment,” she says. “As a result, the social security system will be either more expensive because the average risk is higher or it will be hollowed out. This would be a risk to social cohesion.”

A second significant risk is that the platform-focused, self-employment model is just a few years old and has therefore never been tested in an economic downturn. “If there is a turn in the economic cycle, fewer people will be working as employers will be able stop hiring immediately. Also, many people will not be entitled to full social security benefits - although this depends on the country; some EU countries offer unemployment benefits to all rather than just those who contribute premiums while working. This may make economies more volatile, as consumer spending would fall faster in an economic downturn. Again, the social consequences could be significant for society.”

The gig economy is still in its infancy; it clearly has enormous potential and implications for society – both good and ill. Governments around the world might be well advised both to frame policy to ensure that the gig economy’s teething troubles are resolved and to try to assess its broader impact on the economy in advance of any future recession.

Helping people to face the future

To understand why gig economy workers might prioritise higher immediate earnings over pensions contributions and long-term security, it is important to consider people’s motivations for employment.

“Money is always an important reason for choosing a job,” says Jessica Exton, behavioural scientist at ING. “However, its relative importance depends on whether someone is choosing the job out of necessity or if they have a range of options. Obviously, if it’s because of necessity, money is critical. But if people have more options they tend to elevate engagement, learning, and using their skills in terms of importance.”

Exton notes that a famous study by Princeton University’s Angus Deaton and Daniel Kahneman on pay and happiness shows that above a certain income threshold – around the equivalent of €66,500 a year – emotional wellbeing is not increased by having a higher salary. “More important is that everyone wants to be fairly compensated,” says Exton. “In some studies, having a higher wage than our peers has been found to be more important than the absolute wage we earn.”

A recent report by ING, Saving woes stretch retirement outlook, vividly illustrates people’s myopia when it comes to their long-term needs and planning for the future – a tendency known in economics as hyperbolic discounting. It could well be influencing the choices made by gig economy workers. “Even when people consider the future, they usually do it through the lens of today’s needs and find it difficult to imagine how they will change,” says Exton.

The survey of almost 15,000 people across 15 countries shows that about one in four Europeans have no savings and around half of people don’t know how much goes into their pension (though there may be a tendency to assume it’s enough given just 48% say they plan for retirement in addition to state, employer or other contributions). Notably, younger respondents (i.e. the gig economy demographic) are less worried about their retirement than some other age groups. “At the same time, more than half of European non-retirees in our survey expect they’ll need to earn something in retirement – with more than half of these saying it will be by working in temporary work, such as the gig economy,” says Exton.

Overcoming the disconnect between people’s recognition that they may have to carry on working and their failure to save adequately for retirement is challenging. “The problem is exacerbated because we are all living longer,” says Exton.

One valuable solution, proven in a number of countries globally, is pension auto-enrolment. By making pension saving the default option (requiring people to opt out rather than opt it), savings rates are dramatically improved. According to the Office for National Statistics, auto-enrolment increased the number of people saving for retirement in the UK from 47% in 2012 to 73% in 2017, for example.

“Though clearly beneficial, auto-enrolment is not perfect,” says Exton. “People are sometimes not aware that they have been auto-enrolled and therefore may not have learned about the enrolment process. Moreover, if their situation changes, their arrangements may no longer be appropriate.”

Another effective approach has been demonstrated by the Save More Tomorrow scheme in the US, which was created by economists Richard Thaler and Shlomo Bernatzi. It addresses hyperbolic discounting, myopia and our aversion to losses by linking pension savings to potential future gains.

“Crucially, Save More Tomorrow doesn’t require people to make an extra payment from their existing salary; there is no immediate impact,” says Exton. “Instead, it asks people if they would like to make an additional commitment to their pension from a future pay increase.” Results from a number of implementations show that Save More Tomorrow is extremely powerful in overcoming behavioural barriers and encouraging people to save more for their future.

While not directly applicable to the gig economy (where regular pay rises rarely exist), the thinking behind Save More Tomorrow might nevertheless be applied. “It might be valuable to prompt pension planning by linking it to another activity that people are required to do – for example their annual tax return,” says Exton.

The View is the online magazine of ING Wholesale Banking