Small Businesses and The Gig Economy

You may not be familiar with the name but you have probably used the services available through it.  It is growing quickly and poses a threat to small businesses in the United States.

What is it?

The Gig Economy

A word cloud that says Gig Economy and related words like independent economy projects jobs workers trendsIn the gig economy people have no job security, no benefits, and no stability. They are hired by companies and organizations for temporary projects, or gigs.  Once the project ends, the person moves on to the next one – frequently with a different company or organization.

Out of date labor laws and the Internet are fueling the rapid expansion of the gig economy. New companies pop up almost every day to act as intermediaries between companies and people. These intermediaries set up websites whereby companies can hire people who have the skills they need at the moment.

People post their skills and the type of projects they want along with their fees on these sites. Companies check the sites to see who is available to work on their projects.  They review people’s skills and fees. After contacting several they feel can match their need, they select the one they’re most comfortable with. At the end of the project, the companies pay the agreed upon fee to the intermediary. That company takes a percentage, and then sends the rest to the person who did the work.

Different Groups Work in the Gig Economy

  • People who actually choose this lifestyle and feel they can make a living at it.
  • People who are moving from regular to self-employment and need to generate some income to tide them over until the income from their new business starts to come in.
  • People who have regular jobs and supplement their incomes with the money they earn from gigs.
  • People who need money from these assignments now but would prefer full time employment.
  • People who have regular low paying, full-time jobs. They have to supplement their income with what they make from these assignments.

A coffee shop that is filled with freelancers working on laptops. Many self-employed freelancers will use coffee shops as remote office locations for working, meeting clients and socializing.
A coffee shop that is filled with freelancers. Many self-employed freelancers will use coffee shops as remote office locations for working, meeting clients and socializing.

Let’s look more closely at the second group. Most of the people in this group don’t have the sales and marketing skills they need to get the work they need to survive.  They view these websites as a short-term answer to their problem. All they have to do is register on the website and companies will seek them out. That way they can get business without having to market themselves and make cold calls. The problem is that by taking this shortcut their sales and marketing skills may never improve and they can become trapped in the gig economy.

Right Now, There is Probably a Website . . .

. . . to connect a company or person to any project or task. Some of the more popular websites are:

Uber                                                   Airbnb

Upwork                                              TaskRabbit

Thumbtack                                        Postmates

The Challenge

Americans are competing for work with people from other countries with much lower wages. To get the work, most Americans have to charge far less than they did in the past. Until recently small businesses did not use these websites to find people to do gigs for them.

According to a Manta survey,

  • 67% of small businesses don’t hire any contractors or freelancers.
  • 85% don’t have any plans to in the next year.
  • 73% don’t utilize these websites.

But this is changing rapidly. More and more small businesses are using gig workers today — not necessarily because they want to, but because they have to.

Threats to Small Business

  •  The pool of workers is shrinking. No one really knows how large the gig economy is, but everyone agrees it is growing. A 2016 survey by Freelancer’s Union and Upwork estimated 55 million people now work in the gig economy. Of these, 67% participate by choice, an increase of 10% over the previous year. Intuit and Emergent Research arrive at a lower figure — 3.8 million people in the gig economy today —- but predict faster growth, to 9.2 million by 2021. The gig economy is growing much faster than the overall economy, so the number of workers who are available and interested in being employed full-time by small businesses is actually shrinking.
  • The gig economy increases the amount small businesses have to pay the people they hire. This seems paradoxical, since the gig economy drives wages down overall. But the main function of intermediaries is to create a marketplace for workers and employers. The best workers are in high demand, while others struggle to find any work at all. The gig economy drives up wages for top performers, and drives down wages for everybody else. Small businesses are usually looking for the same top performers that large businesses are, so they have to pay more to stay in the game.
  •  Gig economy intermediaries compete directly with small businesses. An example is Uber and the taxi industry in a large metropolitan area such as Chicago.  Uber has done very well, but most taxi companies, taxi drivers and Uber drivers are struggling. Yes, Uber has created millions of jobs, but they tend to be low-paying jobs. According to the Washington Post, most drivers make significantly less than $15 an hour after taxes and fees.
  • Small businesses can jeopardize their own growth by hiring gig workers. In the traditional employment model, when a small business grows, a regular full-time employee has the opportunity to become a supervisor or manager; then a new employee is hired to replace that person. But gig workers don’t want that opportunity. They are focused on doing what they do best – the work necessary for the assignment.  They are more interested in growing their own business rather than someone else’s. It’s tough for a small business to grow if it doesn’t have its own pool of full-time employees.
  • Small business managers spend more time communicating and managing, and less time actually getting things done. With in-house employees, a small business owner can pull everybody together for meetings to discuss the project and coordinate the work each person is doing with others. The gig economy makes it easier to assemble teams across multiple locations. Another upside is that teams can be formed and disbanded quickly. But such teams tend to be harder to manage, and they also tend to have less cohesion. The gig economy works extremely well for large corporations since they have resources (administrative staff, software tools, etc.) and can provide monetary and other incentives to keep the teams working together until the project is done. But the gig economy often creates more problems than it solves for smaller businesses, who are now stretched even further than they would have been otherwise. And this is not just theoretical. I recently spoke to a small start-up company with people in Britain, India and Mexico. Two of their biggest issues were communicating across long distances, and team cohesion.

The gig economy has some advantages, but most of those advantages are on the side of large corporations. As the gig economy expands, more and more intermediaries will appear. More people will look for gigs, and economic inequality will increase. More money will flow toward the top, and more small businesses will struggle to survive.