A sideways look at economics

At last, something for black-cab drivers to be happy about!

Keen users of controversial ride-hailing app Uber were dealt a substantial blow as Transport for London rejected Uber’s application to renew its licence to operate in London. The precariousness of the gig economy has come into focus yet again.

But what exactly is the ‘gig’ economy? The term gig is borrowed from the world of music, where (typically) a band or musician is paid in weak beer to play a set of original (for which read “unknown”) music in a dingy pub in front of a couple of old blokes and a dog. There is no sick pay. No holidays (not of the paid sort, anyway). No pension. No HR department to complain to. Nothing but you, your ‘music’, and the handful of people in front of you, noisily regretting their decision to drink in a live-music venue. (It’s possible that’s not everyone’s experience, of course…)

So is the gig economy essentially a place where people show up irregularly to a dodgy venue to do work of questionable quality, for which the demand is – let’s say – limited, in exchange for weak beer?

In terms of a more classical definition, it basically depends whom you ask. Some refer to it as a labour market characterised by the prevalence of short-term contracts or freelance work, as opposed to permanent jobs; and others view it as a working environment that offers flexibility with regard to employment hours, with very little workplace protection. Either way, Uber’s practices fall under both definitions and most likely influenced TFL’s decision not to renew Uber’s London licence, a decision officially made due to safety concerns. Uber boasts more than three million users in the capital, serviced by some 40,000 drivers. The futures of all these have been plunged into uncertainty following the announcement.

Sightings of silver Toyota Prii (the plural of Prius according to Toyota) lurking on street corners and cyclists wearing oversized blue backpacks, on which the words Deliveroo are printed, are commonplace in the streets near Fathom’s Hoxton office and are a constant reminder that the gig economy is alive and kicking. But should we be worried?

The flexible nature of working hours in the gig economy benefits employers more than workers on the whole, as employers need only pay when work is available, and don’t have to pay staff costs when there’s no demand. Specifically, this means workers, or ‘freelancers’ as they have often been referred to, have no protection against unfair dismissal and no right to redundancy payments – a legal requirement were they to be in full-time employment. But on the flip side, there are many workers who enjoy the flexibility of working in the gig economy, choosing when and how to work.

But there is a wider issue. How big is the gig economy and how do we measure its size? According to a report published by the Chartered Institute for Professional Development (CIPD) earlier this year, roughly 1.3 million people work in the gig economy in the UK, or 4% of workforce jobs and almost as many as work in the National Health Service. According to a RSA report, almost 30% of workers operating in the gig economy are based in London, and are more likely to be in the 16-30 age group. The growth of the gig economy has made it far easier for people to work in different ways, and crucially be classified as self-employed, potentially skewing the aggregate labour market statistics.

Self-employed workers reportedly pay less tax than traditionally-employed workers doing equivalent jobs. The rise of the gig economy has contributed to an increase in the share of employees working on a part-time basis, which has risen by more than two percentage points since the recession in 2008. And a large proportion, almost half, of workers in the gig economy are earning far less than the threshold for taxable income in the UK, earning less than £4,500 per year, which suggests that they are taking up opportunities on a more casual basis, or ‘topping up’ their income with extra, ad-hoc work, where and when available. The counterfactual is difficult (as always) to judge – if taxes were levied at the same rate on the gig economy as on the rest of the economy, how many of those jobs would be lost as a result?

That being said, there are winners and losers from the existence of the gig economy and the beneficiaries are usually high-skilled workers, namely software engineers and computer programmers. With remote access technologies, workers are presented with an enviable opportunity to work from home (only enviable to the extent that you can distance yourself from the needs of children, or housework, effectively), or on a beach, around their own schedule, be selective about the jobs they take on and still earn fairly high wages. That’s something that was simply not possible 20 years ago. However, at the other end of the spectrum, some workers feel that relaxed labour market regulations have enabled their jobs to be reclassified as self-employed, primarily to make their working conditions and pay worse than before.

Despite all of the evidence, the existence of the gig economy does pose some unanswered questions. Will it push down the NAIRU across countries? Will it keep inflation low and contribute to a rise in inequality? Or, do we not need to worry at all? Isn’t it just a consequence of technical progress? Hopefully it won’t result in any diminution in the supply of pound-shop pop in our dingy pubs. After all, from that unappealing but fertile culture have sprung many great musicians, contributing to the UK’s comparative advantage in creative industries over many decades.

We’re looking into these issues as we speak, and will be producing research in the near future.

Watch this space.