To Combat Long-Term Unemployment, Policymakers Should Embrace the Gig Economy
COVID-19 has thrown the labor market into a tailspin. Across the country, workers are queuing up for unemployment benefits in numbers not seen since the Great Depression. To prevent a massive, long-term depression, policymakers must help get people back to work. But ironically, one of their best tools for doing so may be the one they’ve spent the last six months attacking: the so-called gig economy.
First, no one should underestimate the scope of the problem. With the pandemic’s onset in early March, the unemployment rolls more than tripled, rising from 6.2 million to more than 20 million workers. At the same time, the unemployment rate soared from 3.8% in February to 13% in May. By comparison, in the last recession, unemployment peaked at 10.7%.
Bad as these numbers are, they will likely get worse. Consider what happened after Lehman Brothers collapsed in September 2008. While the unemployment rate rose immediately, it didn’t peak until December 2010, more than two years later. And that stemmed from a short-term shock. Now, as businesses stay shut for months (or close their doors a second time), the damage will only deepen. We may not see the labor market recover for a decade.
For the economy and labor market, this crisis could hardly come at a worse time. According to a recent study by George Mason University’s Mercatus Center, the labor market has been growing more rigid for decades. Employers have been both eliminating and creating jobs at slower rates. That slowdown had led to low job turnover, which may have in turn elongated periods of unemployment. In other words, we should brace ourselves for significant long-term unemployment levels in the coming years.
High long-term unemployment will only complicate the road to recovery. According to the San Francisco Federal Reserve, only about 10% of workers unemployed for 27 weeks or more find a job each month. By comparison, workers unemployed for shorter periods find work at three times that rate. And Pew has found that workers unemployed for long periods see their incomes decline even when they get back to work. They also experience more personal stress and report a greater loss of self-respect.
Consistently high unemployment can have other follow–on effects as well. People who cannot work cannot earn money, and people who cannot earn money cannot pay their bills. Already, a wave of potential evictions is gathering across the country. Millions of people may soon not only be out of a job, but also out of a home.
As a result, policymakers should be focused on getting people back into the workforce as quickly as possible. Fortunately, at least one solution is already available: the so-called gig economy.
Gig-economy platforms offer a low-friction avenue back into the workforce. Instead of searching and applying for a traditional job, a worker can simply sign up through a platform and, almost immediately, start offering services and generating income. Platforms can offer this low-friction entryway to the workforce in part because they do not “hire” anyone; they simply offer a digital marketplace for workers to sell their services. Thanks to modern technology, platforms can match workers with customers with greater efficiency than ever before.
Even better, platforms are uniquely suited to absorb a new wave of workers. They can add new workers and customers at almost no marginal cost. And sometimes, thanks to network effects, the marginal costs are even a net positive. The more people who use a platform, the more efficient it becomes. More workers mean more convenience, which in turn draws more customers. Supply can thus help foster demand, which leads only to more earnings opportunities for workers.
These effects are not merely speculative. We’ve seen platforms react this way before. Some economists have estimated that about eighty-five percent of all new work from 2009 to 2015 arose outside a traditional employment relationship, much of it in the new “gig economy.” Nor was that the first time independent work surged in a recession. From 2001 to 2005, the majority of new work came in nontraditional arrangements. The historical evidence, then, is clear: when traditional employment markets falter, people use independent work to shore up their incomes.
You would think, then, that lawmakers would be working overtime to promote independent-work opportunities. But the opposite has been the case. Among the states, California has been the biggest offender. Late last year, the California state legislature enacted AB 5, a law aimed mainly at converting platform workers into traditional employees. It did that despite data showing that reclassification could reduce earnings opportunities for workers by as much as 76%. Seemingly undeterred by the pandemic, California has continued suing platform holders to enforce the new law. It even sought a preliminary injunction against Uber and Lyft to force the companies to reclassify thousands of workers.
Other states are getting into the act as well. At least three—New York, New Jersey, and Illinois—are considering copycat bills. Like AB 5, these bills aim to upend the platform model and force workers into traditional employment relationships. That is, their whole point is to close off independent-work opportunities.
This is the wrong reaction. At a time of historic unemployment, lawmakers should be doing everything they can to get people back into the workforce. Instead of attacking platform companies, they should be making platforms available to as many workers as possible. Platforms can offer workers both a safety net and a bridge, helping them along to their next traditional jobs. But platforms can play that role only if they continue to function. Right now, policymakers in some states seem bent on making sure they can’t do so.