Coronavirus and the Gig Economy

By Kevin D. Williamson

Tuesday, March 31, 2020

It takes only one bad experience with a business to sour a potential customer forever. One attempt at buying something online from Lowe’s was enough, and I do not expect to try again. General Motors is dead to me. “We know that you have a choice when you fly!”— oh, if I had a real choice, it wouldn’t be you, American Airlines.

It is easy to blow it. One of the easiest ways to blow it is by hiring the wrong people, and the easiest way to do that is by losing the right ones.

That fact has to be on the minds of a great many corporate managers right now, especially managers of retail businesses and home-delivery services whose customers are very much emotionally primed to receive a lasting impression of Instacart, Amazon, and a few other firms that suddenly find themselves serving as critical outlets in a largely shuttered economy. This is an important time for many of those businesses — and the employees know it.

The suits had better listen.

Instacart workers organized a strike of sorts, demanding more money — and more hand sanitizer. The Philadelphia Inquirer describes the Instacart strike as “radical” in that the workers in question are “gig” contractors, not regular employees and not union members. A strike by non-employees may seem radical, but it is a textbook example of a dynamic that has long been understood by law-and-economics scholars: Formal legal rights and standing often matter less than pure economics. The government doesn’t really decide if you can strike effectively — the market does.

For all the power United Auto Workers has, it could not in the long term dictate wages and benefits for its members that would cause the manufacturers to make losses; even without formal protections, gig workers have the power to command higher wages when demand for their work increases — and it is increasing right now.

The group organizing the Instacart action, Gig Workers Collective, a 501(c)(3) organization, does not enjoy the formal power of a labor union; it has no real legal status and does not engage in collective bargaining under federal labor law. And none of that matters. What matters is whether Instacart gets my Red Bull, Advil, and asparagus here in a timely and reliable fashion. And it needs good people to get that done.

(A little free PR advice, too: Don’t make your food-handling employees beg for hand sanitizer during an epidemic.)

The great economist Ronald Coase wrote a lot about “transaction costs.” In one very famous article, “The Problem of Social Cost,” he posited (forgive my simplification) that where transaction costs are low, disputes should produce economically efficient results irrespective of who is legally entitled to what. (“With costless market transactions, the decision of the courts concerning liability for damage would be without effect on the allocation of resources.”) In “The Nature of the Firm,” Coase dealt in part with the fact that transaction costs are not low: Businesses hire people to work eight hours a day knowing full well that their employees will not (and cannot) make maximum productive use of every minute of those eight hours and that there are other efficiencies in maintaining full-time staff; they keep regular employees instead of bidding out every task because the inefficiencies of recruiting and managing contractors are in many cases greater than the inefficiencies of keeping employees. You don’t always know when it is, precisely, that you are going to need Bob to do whatever it is that Bob does, and, in real-world organizations, people perform work beyond their formal job descriptions. So you hire a Bob rather than bidding out bobjobs every time a bobjob pops up.

For much of the 19th and 20th centuries, the efficiencies that large, rigorously managed organizations could wring out of their resources (human and otherwise) tended to favor the creation of large firms, to the extent that some people came to believe that monopolies were natural and inevitable and — in many cases — desirable, eliminating “destructive competition” and the replication of effort, all those 23 different kinds of deodorant that keep Senator Sanders up at night. (His admirers less so.) But information technology and other developments reduced transaction costs of many kinds, which changed the nature of the firm. “Outsourcing” is used as a synonym for “moving the factory to China,” but originally it referred to transferring in-house operations to third-party contractors, beginning with things such as custodial work and building maintenance that are not part of a company’s core mission. It became more efficient for one janitorial company to clean 20 offices than for 20 firms to each maintain their own janitorial staffs. In some cases, this left the workers themselves no better off than they had been, while in other cases it left them better off, with higher wages and more security thanks to a portfolio of clients. But it did often mean fewer full-time jobs performing a given task — that’s where the gains in efficiency often came from.

The so-called gig economy is another evolutionary episode in the nature of the firm, one also based largely on technological developments — smartphones and apps. (It has been just shy of 13 years since the first iPhone was sold — the pace of change has been extraordinary.) The smartphone has allowed firms to offload a lot of labor onto their customers (you do the work of depositing your own checks, getting your own boarding pass, etc.) and to benefit from a quasi-independent work force that can be rallied or idled — in theory — in an instant. Lower-wage workers will always have relatively weak negotiating positions (that is why they are lower-wage workers) but transaction costs have gone down for them, too: They have more flexibility and choice, and they have the technological tools to organize themselves in a sophisticated and effective manner. The picket line is passé — in the gig economy, your work force can simply —  poof!—vanish. Firms obviously still have a great deal of power compared with an individual gig worker or to a few dozen organized gig workers, but it is not the case that all of the advantages have accrued to the employers over the employees.

And the employers had better take that to heart. An embarrassing labor shortage in the current context could be a brand-killer. The gig workers have some new power at the moment, and they should use it. On the flip side, they must incorporate into their calculations the fact that more than 3 million people have just filed new unemployment claims — there is supply coming into the market. These things get complicated. That’s what negotiations are for.

Efforts to shame workers in warehouses and grocery stores and delivery vans into selflessly putting off demands for better wages and conditions because of the coronavirus epidemic are wrongheaded. These are precisely the times that show how important it is to have good people in those jobs. The smart companies know that, but it is easy to forget when things return to normal. (Which they will.) Labor markets work, and they work both ways. The people in the warehouses and on the overnight stocking crews don’t need a high-five from their customers — they get paid in money.

So pay them.