'Lawmakers Should Respect Freelancers'

An economist breaks down new research about the gig economy that shows it benefits freelance workers—until regulation steps in.

I was the kid who won the elementary-school spelling bee and edited the high-school newspaper. I could pass the tests in calculus and statistics classes, but they left me with crippling headaches. Thus, when I see an article like this one that economist Mark Jamison posted last week about new research into the gig economy, I’m not shy about asking followup questions to make sure I understand what all the math means.

Thankfully, Jamison was more than happy to help me understand his article, titled “The Gig Economy Benefits Freelance Workers—Until Regulation Steps In.”

Jamison is a nonresident senior fellow at the American Enterprise Institute, which is a public policy think tank dedicated to defending human dignity, expanding human potential, and building a freer and safer world. Its scholars are rooted in beliefs in democracy, free enterprise, American strength and global leadership, solidarity with those at the periphery of our society, and a pluralistic, entrepreneurial culture.

As an economist, Jamison focuses on regulatory and antitrust issues, with an emphasis on information technology. He told me he’d heard a lot about people’s concerns with regard to the gig economy, so when he saw this new study in American Economic Review, he decided to write the article about it.

I’m glad he did, because the new research shows the gig economy is benefiting a lot of people, sometimes in surprising ways.

Here’s our conversation.

Q&A with Mark Jamison

You cited this new study in your article. You wrote that “workers in the study capture nearly half of the total economic value created in each transaction.”

I read your next paragraph with the math, but I don’t understand what that means. Would you please explain it to me like I’m a 10-year-old?

When someone decides to offer their work on a gig website, the person takes into consideration how much money he or she might make doing something else and how much the person might enjoy the work making that money. We call that the person’s opportunity cost. Let’s say that’s $15 per hour.

The buyer on the website does something similar: He or she thinks about what would have to be paid to get this work done some other way. Let’s say that is $20.

On average, according to the study, when buyers and gig workers reach an agreement, they roughly split the difference. The buyer pays the gig worker a little less than $17.50 in this made-up example. This doesn’t mean they consciously split the difference. It means the negotiations tend to land there.

Got it. You also wrote about how using online gig platforms doesn’t put independent contractors into a situation of unlimited competition, the way people typically assume they do. On average, you wrote, clients considered just 18 applicants before deciding whom to hire.

Why is that significant?

People who want to regulate that economy argue that the workers face unlimited competition, resulting in a race to the bottom for wages. That’s false.

The buyers view each gig worker as offering something different, so the gig workers don’t have to compete just on price.

By way of example, suppose gig worker Joe is offering his services on a gig website. And let’s say that there are thousands of people just like him. It turns out that Joe isn’t competing against those thousands because a buyer never has time to review very many of them. The buyer only reviews on average about 18 people, many of whom are different from Joe.

So the buyer believes Joe is relatively unique, which means Joe can charge accordingly.

That aligns with my personal experience as a freelance writer and editor for 22 years now, even before gig platforms existed.

You also wrote that “a one standard deviation improvement in a worker’s profile is as valuable to the client as a 38 percent wage discount. These frictions in the search process, combined with the ability of workers to signal quality, allow many freelancers to set bids well above their costs. The study finds workers receive markups averaging 28 percent.”

I’m having trouble wrapping my brain around that part of your article too. Would you break it down for me?

Let’s go back to Joe in the previous example. Joe describes himself online, as do the other gig workers. Let’s say that for a particular job we can score the online descriptions and find that 68% of the applicants score between 40 and 60.

Let’s say Joe scores 40. If we compare his wages to those scoring 60, we find that he receives wages that are 38% lower than those scoring 60.

So, if he could improve his profile to score 60, which would be one standard deviation higher than his current score of 40, he would improve his wages those 38 percentage points: 68% is one standard deviation.

That explains what you wrote—which I loved—about how California’s freelance-busting law, Assembly Bill 5, shrinks opportunities.

I also loved how you wrote: “Regulations that assume freelancers are unable to act in their own interests can inadvertently take away the very agency that defines gig work in the first place.”

I couldn’t agree more. What do you think would be a better path for lawmakers and regulators to follow with regard to independent-contractor policy?

I would encourage lawmakers to recognize that such freelancers know more about what’s best for them than do the lawmakers. Every freelancer is different, with different needs, aspirations and opportunities. And freelancers are talented, ambitious people who can take care of themselves quite well.

Lawmakers should respect freelancers’ abilities, including their ability to take agency.