What Should We Make of the Gig Economy?

Noah Smith's recent column on job outsourcing does two things: it repeats mistaken claims about the plight of the average worker in the U.S. and it accurately identifies market-generated opportunities that could deliver economic improvements for everyone. In this post I'll respond to the former and give my thoughts on the latter.

Here are the problems Smith identifies. In some cases he's factually incorrect. In others I think it's important to shed light on the causes of the problems.

The average American worker is confronting a number of problems right now -- stagnant income,  an overhang of debt from the housing bubble, the high cost of college and the replacement of pension plans with high-fee, low-return 401(k) plans. But few would deny that one huge challenge is economic insecurity. Political scientist Jacob Hacker’s 2006 book, "The Great Risk Shift," discusses how many risks that were once borne by companies are now shouldered by individuals. ... Basically, the era of "good jobs” is a memory for most workers. Private-sector unionization is disappearing, average job tenure has plunged and benefits have been cut. 

First on the list is income. Data on total compensation shows that people are better off in real terms than they were 5, 10, and 15 years ago. Wage growth isn't stagnant. Neither is non-wage compensation, implying that benefits are not being cut. If medical benefits have been cut recently, it's likely a result of the "Affordable Care Act."

He mentions an "overhang of debt from the housing bubble." Such an overhang wouldn't have happened if banking regulations and artificially low rates hadn't incentivized the unsustainable housing boom. High college costs have a similar cause.

His comment on pensions is almost comical. Defined benefit pensions are a recipe for financial disaster for both private companies and state governments. (GM and California are examples). 401k plans avoid the risks of insolvency due to a lack of state government funding. Those high return pensions can be a real pain in the wallet for taxpayers.

Smith goes on to discuss the growth in what he calls the"gig economy" and the outsourcing it relies on. Businesses like Uber operate on a contractor model and function as middlemen between customers and drivers.

Information technology facilitates outsourcing, so that much more work can be divided among armies of independent contractors instead of done within large companies. Many believe that this will kill off what little security corporate jobs still provide, leaving us as permanent temps in a “gig economy.”

Yes, technology might make workers more independent in some sectors, but certainly not all. Another incentive for employers to use contractors rather than employees is the massive regulatory burden associated with employees. In fact, Department of Labor regulatory restrictions have increased more than 12% since 1997. Repealing unnecessary regulations might shift the cost-benefit analysis enough to keep more corporate jobs as technology improves.

On the employee side, Smith points to what he believes to be potentially beneficial policy changes:

So what should the U.S. do about outsourcing and the gig economy? As Allison Schrager writes in Quartz, existing laws are set up to favor corporate jobs. There is, for instance, a tax deduction for employer-provided health insurance. If that deduction were removed, the money could be used to provide bigger health-care subsidies for all Americans, including independent contractors and entrepreneurs. Unemployment insurance could even be supplemented or replaced with a system of government-subsidized wage insurance, for when large recessions force down the wages of independent workers. 

It's not surprising that Smith would advocate more health-care subsidies and increased employment insurance. However, insurance companies are the primary beneficiaries of such schemes, with consumers footing the bill of rapidly increasing costs. The root causes of healthcare problems in the US go back much further than most people are willing to investigate. Further, evidence suggests that reduction in unemployment benefits decreases unemployment. Wouldn't a better situation be to drop the taxes and subsidies  and allow people to choose medical care arrangements that suit them?

Smith ends by noting that the gig economy could be beneficial for a lot of people and I certainly agree. Clearly many people judge a "job" at Uber to be better than their other options. However, I can't follow Smith all the way. He suggests we "change the culture" to embrace the gig economy. I can't speak for other economists, but my own aversion to contemplating changes in culture at this level have to do with acknowledging my inability to know what's best for other people.