How Freelance Work Helps, And Hurts, The Economy

For the longest time, Americans worked their entire career in a 9 to 5 job for no more than 3 different employers. These days, however, it’s all about the freelance economy, which provides workers with flexible opportunities to make a living. Many experts point to technology as the primary catalyst of this surge in non-traditional employment arrangements.

Ride sharing company Uber, for example, upended the taxi industry by allowing anyone with a valid driver’s license and functioning vehicle to become a taxi service on their own time. The broader freelance economy now spreads beyond low-skilled labor to well-regarded professions such as law or accountancy.

Despite being in its infancy stage, the freelance economy currently makes up about 35% of the U.S. workforce and collectively earned about $1 trillion in 2015, according to a large-scale survey conducted by the Freelancers Union. The findings are undoubtedly significant, but it’s not an official statistic recorded by the Bureau of Labor Statistic, which has otherwise neglected to account for freelancers since its 2005 survey. At the moment, the BLS records alternative work arrangements as contingent work, defined by variable hours and temporary job security.

Since the freelance economy rose to prominence, there has been an obvious shift in the number of contingent workers, even if it hasn’t been formally counted in over a decade. Indeed, freelance work yields benefits relative to traditional employment such as greater flexibility and ease of finding employment.

Sometimes it can bridge the gap between employment opportunities when a traditional 9 to 5 role isn’t possible. But most of all, the sharp rise in contingent work has helped boost labor participation and bring down unemployment rates, which hovered around 10% following the Financial Crisis.

On the surface, this might seem beneficial to the broader economy. An expanding labor force means greater disposable income and thereby more consumer spending. But given the nature of today’s economic environment that doesn’t seem to be the case.

The main drawbacks of freelancing that often go overlooked are a lack of benefits (i.e. paid vacation or healthcare) and limited job security. A permanent state of non-permanent wages plays a major role in the historically low growth of GDP per capita and productivity. This is especially concerning when you factor in the rapidly rising cost of living across major cities that freelance work is most prevalent.

Interestingly enough, the decline in purchasing power over the past 4 decades nearly mirrors the upward trend of the gig economy.

At the same time, a majority of freelancers don’t have access to social safety nets or traditional benefits such as health care. The passage of the Affordable Care Act into legislation put many of those concerns to rest but with President-Elect Trump looking to repeal or change it in his first 100 days in office, freelancers could be on the hot seat.

Regardless of the downsides, a recent McKinsey study found that 70% of freelancers made the conscious choice of working part time. For employers, this is a huge relief. In many cases, it’s more expensive to hire a full time employee than an equally skilled freelancer worker. Businesses need to pay additional taxes, benefits and cover training costs when bringing on a new employee where a freelancer can hit the ground running.

In this regard, businesses should theoretically gain a competitive advantage from hiring a fleet of contract workers on a project per project basis. If that becomes the case, we will see a huge surge in contract work at all levels of employment in the coming years.

With each passing year, it becomes less clear whether the growing freelance economy is benefiting or hurting the broader U.S. economy. On the one hand, it pushed labor participation rates higher and brought down unemployment following the Financial Crisis, but on the other, bellwether indicators such as productivity and per capita income growth remain low.

One thing is certain: the freelance economy will continue to grow and disrupt labor markets for the foreseeable future.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Jobs & Unemployment