The influence of the gig economy on entrepreneurial activity


TAt the moment, more than one third of the workforce in the United States works (part-time) as freelancer (Muhammed, 2019). Almost half of the freelancers over the age of 55, use supplemental gig work as a means to finance their retirement. It is expected that by 2020, almost half of the entire population will (part-time) perform gig work.

These facts are caused by the rise of the gig economy. A gig economy is an economy in which temporary, flexible jobs are common. In the gig economy, employees usually work part-time as contractors and freelancers, whilst in a classical economy employees work full-time, rarely switch jobs and often work for the same company their whole career (Kenton, 2018). During the last decade the gig economy has experienced a significant rise, caused by three major developments: First, Millennials have a different attitude towards working than the traditional workforce, as they prefer to have variety in work and a good balance between working and private life. Second, since the financial crisis of 2008, companies increasingly use gig workers to lower labor costs and to improve flexibility. Third, due to technological advances and the digitalization of the world, gig economy platforms were introduced, improving the access to gig work and workers for both firms as the labour force (Muhammed, 2018).

However, whereas the rise of the gig economy has several welfare benefits (Jennings, 2018), there are also possible downsides to it. In the paper “Can you gig it? An empirical examination of the gig economy and entrepreneurial activity.”, authors Gordon Burtch and Seth Carnahan researched a possible downside, whether the introduction of a gig economy platform in a geographical area would lead to a decrease in entrepreneurial activity.

Context & methodology

The authors used the introduction of Uber X into a specific geographical area as measure of an introduction of a gig economy platform. Uber X was chosen for two reasons: First, Uber enters the economy city-wise, meaning that for a specific area, the service might be available in one city, but might not be in another. This makes it possible to directly analyse the results of the entry of Uber X in a certain area. Second, Uber X is used instead of the (premium) Uber Black service because of the lower entry barrier and a larger network of drivers. Additionally, to measure the influence of entry barriers of the gig economy on the observed effect, the results gained by researching Uber X are compared to those of Uber Black.

The research was conducted as a natural experiment. The authors used real life examples of entries of the gig economy and measures of entrepreneurial activity. The researchers measured entrepreneurial activity by combining 2 data from 2 sources:

  • First, the US Census Current Population Survey (CPS). In this survey, self-employment is measured.
  • Second, Kickstarter campaign data was used, where the volume and size of Kickstarter campaigns were measured.

Results

The research found a significant negative correlation between the introduction of the gig economy and the entrepreneurial activity within the same geographical area. This negative correlation can be explained by the fact that gig economy platforms offers a source of income for the unemployed with a very low entry barrier, so there is no direct need for them to engage in entrepreneurial activity in order to ensure an income.

However, the research also found a significant increase in the average quality of entrepreneurial activity. According to the findings, this can be explained by the fact that people with mediocre or bad ideas that would engage in entrepreneurial activity without the entry of a gig economy platform, are now participating in that gig economy. The people that are still convinced of their own entrepreneurial qualities are pursuing their idea and don’t give it up to start driving for Uber X. These people apparently have a higher quality entrepreneurial activity, which increases the average quality of the entrepreneurial activity.

Additionally, a significant positive correlation was found between lower entry barriers of a gig economy platform and its effect on entrepreneurial activity. The research found that the introduction of Uber X (which has a low entry barrier), leads to a bigger decrease in entrepreneurial activity and a higher increase in average quality of entrepreneurial activity, as opposed to the introduction of Uber Black (which has a higher entry barrier: you have to buy a black car).

Strengths

The paper written by Burtch and Carnahan (2018) included several strengths. First, the paper included several robustness checks regarding the validity of data. By making use of multiple measures for the same phenomena, it is more likely that the correct effect was captured. Second, another strength of this paper would be the novelty of the research, as the paper is the first to examine the supply side of the gig economy. By researching novel subjects, the added-value to literature of this particular research area is higher. Third, as the paper makes use of two different data sources to measure entrepreneurial activity, the reliability of the data used in this paper is higher.

Weaknesses

Besides several strengths, the research done by Burtch and Carnahan (2018)  has several weaknesses as well. First, a weakness of this paper would be the low generalizability of the sample. The research is solely performed in the United States, which is a country with low unemployment benefits. According to Cowling and Bygrave (2002) has a significant correlation with entrepreneurial activity. Having only performed research within the United States, the generalizability of the results is lower, which reduces the findings’ value.

Second, the paper’s assumption that Uber drivers would otherwise engage in entrepreneurial activity, might be too big of an assumption. As Uber offers low-skilled jobs, its drivers might not be the people who would otherwise engage in entrepreneurial activity. People might even start driving Uber X to make some money, but use the flexibility in planning to actually start a business next to driving for Uber X. Moreover, the paper assumes that the entry and timing of Uber X is exogenous with respect to entrepreneurial activity. These assumptions both deteriorate the research quality, but proved necessary to perform the research.

Lastly, the paper contains data issues. For the first time, the volume of Kickstarter campaigns was used as a (partial) measure for entrepreneurial activity. Kickstarter campaigns may be run multiple times, which implies that the quality of the data might be lower than expected. Another reason why the data from kickstarter might not be generalizable, is that it was obtained during a period of economic recession, during which unemployment rates are higher than normal, which could mean that the impact might be different than it would be during a ‘normal’ period of time.

Implications

The paper proves worthy both in research and in practice. For academics, this paper proves valuable as it is one of the pioneers in researching the supply side of the gig economy. On top of that, the researchers also pioneered in using kickstarter as a measure for entrepreneurial activity, despite its limitations. For policymakers debating about the legality of gig economy platforms as Uber, this paper could provide relevant insights for crafting legislation around gig economy platforms.

In many countries Uber faces legal problems.

Conclusion

The paper provides new information towards research about the gig economy as it offers insights on the supply side, which was rarely researched previously. The insights of this paper are relevant but should be taken cautiously however, as there are multiple notable concerns towards the validity, despite the efforts of the authors to ensure the quality.

References

Burtch, G., Carnahan, S., & Greenwood, B. N. (2018). Can you gig it? An empirical examination of the gig economy and entrepreneurial activity. Management Science, 64(12), 5497-5520.

Cowling, M., & Bygrave, W. D. (2002). Entrepreneurship and unemployment: relationships between unemployment and entrepreneurship in 37 nations participating in the Global Entrepreneurship Monitor (GEM) 2002. In Babson College, Babson Kauffman Entrepreneurship Research Conference (BKERC) (Vol. 2006).

Gooch, K. (2018). More Americans turn to crowdfunding for medical bills: 6 things to know. Many Americans struggle to afford their medical bills and are increasingly turning to crowdfunding for support, reports Yahoo Finance. Retrieved from https://www.beckershospitalreview.com/finance/more-americans-turn-to-crowdfunding-for-medical-bills-6-things-to-know.html

Jennings, M. (2018). 7 Reasons Why the gig economy is a Net Positive. Retrieved from https://www.entrepreneur.com/article/310685

Kenton, W. (2018). gig economy. Retrieved from https://www.investopedia.com/terms/g/gig-economy.asp

Muhammed, A. (2018). 4 Reasons Why The gig economy Will Only Keep Growing In Numbers. Retrieved from https://www.forbes.com/sites/abdullahimuhammed/2018/06/28/4-reasons-why-the-gig-economy-will-only-keep-growing-in-numbers/#6344d33e11eb

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s