GIG ECONOMY AND WORKER WELFARE_Julie Toth

February 2018

Adjunct Professor Julie Toth

By Adjunct Professor Julie Toth, Chief Economist, Australian Industry Group

Proposition: The wages and conditions of Australian workers providing services in sectors affected by the rapid growth of digital on-demand subcontracting platforms will, on average, be expected to fall without further government intervention.

The latest wave of digital technologies are enabling a ‘gig economy’ that is changing the way in which supply chains and work tasks can be organised. Questions now being asked about it include: is this the start of a permanent structural change to all work arrangements, an incremental step change, or merely a passing fad? How will it spread? And what (if anything?) should be done to address any costs or concerns that might arise?

These questions have divided our panel of economists more evenly than many other recent policy questions. Of the 31 economists participating in the panel this month, 29 per cent agreed that worker conditions will, on average, fall without government intervention. 45 per cent disagreed and 26 per cent were uncertain.

Those who agreed were slightly more confident in their view, so on a confidence-weighted basis, 31 per cent agreed and 44 per cent disagreed, with 26 per cent uncertain.

This divergence of views reflects the depth and range of issues that are already emerging from the nascent ‘gig economy’ for would-be workers, consumers and communities. Interestingly however, although the technologies might seem shiny and new, the list of potential policy problems arising from the gig economy to date are not so new.

Economists who agreed that government intervention will be required to tame the ‘gig economy’ pointed to four distinct areas that might warrant a regulatory response.

1. The bargaining power between would-be workers and their task-masters is likely to shift. Beth Webster correctly notes that “policies of strong minimum employment conditions” are a long-standing and well-supported policy tradition in Australia. But if both employers and employees cease to operate within these established employment norms, then the power relationship will shift.

   John Quiggin highlights that it is this change in relative power (rather than any change in technology) that threatens the employment relationship.

   “The ’gig’ economy is a recreation of conditions of precarious and contingent employment that always arise when employers have enhanced bargaining power ... The inequality of bargaining power ensures that the new conditions are less secure.”

2. A second wage-dampening effect comes from the sheer weight of numbers that can enter this new labour market. Paul Frijters suggests that the wage-dampening effects of a big influx in service providers (that is, the ‘gig economy’ workers) might occur in the short-run only, because “the market power of the current providers reduces, which will reduce after-tax wages and conditions in the shorter run. [But] In the long run the size of the market expands and conditions stabilize”.

   Harry Bloch adds however, that if the ‘gig economy’ becomes big enough to compete against more traditional businesses, this expansion of cheaper labour “may very well spill over into downward pressure on wages and working conditions for workers who are treated as employees under current regulations”.

   Compounding this situation for gig workers in both the short and long term is the very low skill level required for most of the ‘gig economy’ jobs on offer (to date anyway). This means low barriers to entry and an extremely large pool of potential workers, so this new labour market could take a very long time to stabilize, if left to its own devices. Kevin Davis summarises this problem as one of a very “elastic supply of labour to that sector reflecting relatively low specialised skill requirements”.

   In the case of tasks that can be done remotely, the potential pool of workers can become global, even for the smallest of tasks. This is already happening in small pockets of the ‘gig economy’ (such as IT, media, book-keeping and perhaps ironically, web design and management).

3. Cost-shifting and risk-shifting within the ‘gig economy’, away from the employment ‘platforms’ and towards workers and consumers. Lisa Cameron points out that many existing gig economy platforms utilise sub-contracting arrangements in which “the ‘employer’ takes very little responsibility for the ‘employee’ (including not even acknowledging that they are an employer) and most of the risk falls on the worker.”

   For consumers, if (or when) the gig economy extends into professional services, then the global nature of the ‘gig economy’ could make individual qualifications and professional registrations harder to assess, verify and enforce.

   This effectively increases the risk of purchase for the consumer and may require another layer of regulation from government or professional bodies (e.g. stricter verification procedures to register for work online). This cost and risk-shifting is more amenable to regulatory redress than the inherent problems of bargaining power and a hugely elastic low-skill labour supply.

   For example, workers compensation premiums, car insurance, superannuation, professional indemnity insurance and other add-ons can be mandated, regardless of the ‘employment’ status of the sub-contractor or service provider.

4. Heightened risk of tax evasion in some areas of the ‘gig economy’. Paul Frijters notes that in the early stages of the gig economy to date, some of “the online platforms run on a tax-evasion business model, so the key problem for the government is how to tax the platforms or monitor the service workers activities and tax those.” Such tax evasion can be tackled in various ways, including through the application of GST on all services (eliminating minimum price or income thresholds for GST) or through international taxation agreements that aim to close access to global tax havens and loopholes.

More economists disagreed with government intervention in the ‘gig economy’ than agreed with it, but they were still a minority at 44 per cent of this month’s panel. Reasons for resisting calls for intervention included:

1. The gig economy is no different to other parts of the labour market and does not require any unique or additional regulations. It exhibits low wages because it targets low-wage low-skill sectors that have few barriers to entry. Taking into account this lower starting point, “the rate of change of wages in the gig economy will be roughly the same as the rate of change of wages elsewhere” (Geoffrey Kingston).

   And although we might want to regulate the “working conditions for those poor bicyclists (although there's not much the government can do about early sunsets, hills, and driving skills in certain capital cities)” for other reasons and regardless of how they obtained their work, “wage regulation sounds like a bonkers idea in response to the gig economy” (James Morley).

   John Freebairn agrees that “current general economy labour market protection policies seem more effective than the suggested option of additional ‘new industry specific’ policy interventions”.

2. Productivity gains from ‘gig economy’ technologies will lead to rises not falls in aggregate incomes and living standards, at least in the longer run (Julie Toth, Michael Knox, Doug McTaggerty, Nigel Stapledon, Brian Dollery).
3. Slow wages growth is due to secular stagnation and the slow global recovery since the GFC and not the ‘gig economy’ which is too small and/or slow to affect aggregate wages and labour markets. There is little evidence that structural economic change has sped up as a result of the’ gig economy’ and related technological changes (James Morley, John Freebairn).
4. Periods of adjustment and transition require greater – not lesser – labour market flexibility in order to maximise the benefits of the adjustment. Tony Makin argues that “During periods of significant structural change what is needed is a highly adaptable and flexible labour market”.
5. Governments are generally rubbish at predicting and preparing for the future and the ‘gig economy’ is likely to be no exception. Tony Makin notes that although well-meaning, government “intervention runs the risk of worsening overall working conditions and wages”, while Lin Crase reminds us that “it's important to acknowledge the limits of the state in (a) predicting some of these changes (b) instigating responses that allow incomes to grow while dealing with potentially excessive inequality”.

Economists who were uncertain pointed to the significant uncertainties surrounding the gig economy. Lisa Cameron rightly points out that the gig economy has targeted low-skill sectors to date and that “wages and conditions of workers in these sectors are [already] low and are likely to remain low, whether they will fall further in future is unclear.” But where these technologies take us next is anyone’s guess and we must be ready and willing to respond.

In summary, the transition to any genuinely significant new technology is often a disruptive and somewhat fraught period of socio-economic change. Despite the long-term benefits that new technologies generally bring to a community, the short-term costs, benefits and concerns are likely to be unevenly distributed and may require a temporary regulatory response.

Many new technologies have been developed, adopted and adapted in incremental steps that can be easily and enthusiastically digested, but a handful of technologies have brought widespread structural disruption to whole industries and communities (e.g. steam, electricity, petrochemicals and computers).

We are yet to see whether the ‘gig economy’ will join the list of big, historic, structural disrupters or turn out to be merely an incremental step towards getting faster and cheaper take-aways, tax returns and night-rides home.

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