Thoughts on mechanisation and the gig economy

I came across this article about mechanised kitchens in Bangalore making dosas, biriyanis, and other Indian food. Such automated 'cloud kitchens' which offer takeaways, while still only a handful, have become attractive in Covid times. The author, while covering all other aspects, is oblivious to the labour market effects of such technologies.

I am referring to the issue of the problems with promotion of labour saving technologies in a labour abundant country like India. The reality of the next generation having to face a labour market dominated by low-paying, low-skilled, and limited labour mobility jobs of the gig economy, instead of the productive, skilled, and higher paying jobs in manufacturing and services is already on us. And its consequences for long-term economic growth prospects cannot be salutary. 

This raises some questions about whether public policy should encourage such labour destroying innovations. For example, why should the favourable tax concessions and other incentives that are provided to startups be offered to labour saving technology startups? Agreed that it's not easy to make the distinction between labour saving and productivity enhancing technologies, and that any structural transformation necessarily involves movement greater mechanisation.

But the core issue cannot be overlooked. And, as I have blogged on multiple occasions, there are at least three reasons to be concerned:

1. The breadth and depth at which the mechanisation is happening is striking. Greater mechanisation is penetrating not only all the largest labour markets but also deeper into those markets which supply most of the lesser skilled good jobs that are on offer in any modern economy. 

2. The pace at which the mechanisation is happening is much faster, thereby depriving markets and societies the time to adjust and accommodate the labour displaced by such mechanisation. Equitable and sustainable  change always happens at a certain measured pace, not as disruptive breaks. 

3. While there have always been low-paying and lower skilled jobs, unlike the gig workers, they've always enjoyed some form of, even if inadequate, labour market protections and job security. The gig-work, both by regulation and also by the nature of the work and worker acquisition channels, offer no such safeguards.

BCG has a study which does a comprehensive examination of India's gig economy. While the consultant's enthusiasm is debatable, the report offers quantitative assessments on several areas overlapping with the gig economy. The major categories of gig work involves ride-sharing (Uber, Ola etc), food/parcel delivery (Amazon, Zomato etc), task parcelling (TaskRabbit, Urban Company etc), care and wellness etc.

India's gig economy is dominated by lower skilled jobs, more than other economies.

The report sees a potential for 90 million gigable jobs, mainly in construction, transportation, logistics, and personal services, involving over $250 bn in volume of work. 

The report explores the universe of personal services that are demanded by middle class urban households (annual incomes above Rs 5 lakh). This is a fascinating graphic which shows that maids, cooks, and drivers form more than 85% of the average of one full time equivalent (FTE) of workers required by these households. It assesses a market demand of 50 million FTEs (or jobs) in this space of which 12 million are potentially gigable!

Given the part-time nature of the demand with these services, they fit neatly into the gig economy framework. However, the big challenge is with the likely reluctance of households to hire workers from the gig economy world for many of these activities.

Talking about the 90 million gigable jobs, the report writes,

The vast majority of these are jobs (around 87 million) that could migrate to technology platforms from their current offline mode of matching workers and jobs from discovery to fulfillment. In addition, we estimate that approximately three million net new jobs could be created, servicing constrained gigable jobs and latent demand for services in households. Delivering these jobs as ‘gigs’ via technology platforms will contribute to better demand-supply discovery, price transparency, productivity improvement, compliance with worker benefits and protection, and effective public policy design. Even at a conservative estimate of INR 16,500/month in earnings, India’s gig economy could transact over USD 250 billion of work, and the gig economy could potentially contribute an incremental 1.25 percent (approximately) to India's GDP over the long term.

This is where the sell-side part of such studies, which gloss over the real world challenges of informal labour market matching, takes over. 

Take the example of personal services. The unwillingness of households to hire such workers from the gig economy and instead rely on their word-of-mouth informal network points to the importance of credibility and trust in such services. For gig service providers, this demands going much beyond their current mostly digital platform-based jobs market matching model towards a greater brick-and-mortar approach of recruiting, training, accrediting, and managing their workers. This is orders of magnitude harder than developing a technology solution. 

It's therefore unsurprising that despite all talk about jobs market matching platforms for nearly two decades, India does not have service providers actually offering significant numbers of the aforementioned personal services demanded by households in any city or town. Though there are many claimants, even a cursory glance at their websites would expose those claims.

There is another important factor - affordability. A combination of platform and feet-on-the ground adds layers of costs, which limits the addressable market. It's the old story of limits to formality - there are only so many Rs 100 haircuts going around!

Barbers sitting on roadside and on makeshift arrangements offering haircuts for Rs 10-30 will form the vast majority of haircuts in India for the foreseeable future. In contrast, salons where the haircuts cost Rs 75-100 or more, likely to be in the formal sector, form only a very small proportion of haircuts. Governments can do whatever it wants to force these barbers to become formal, but they will not. The simple reason is that there is only so much demand that can be generated for salon haircuts! The shift to salons will happen only with economic growth.

Much the same set of problems apply to construction, logistics, transportation, and most other sectors. Even a cursory study of the nature of the current almost completely informal construction labour contracting market will reveal the daunting nature of social, cultural, and other challenges to be surmounted for a technology platform to succeed. 

Another problem with all these gigable services is that they suffer from an acute deficit of standards and credentialing. While most of these services do not even have any standards much less credentialing and certification, even where such standards are available they demand excessive qualification requirements. In light of all the above, the binding constraint to the development of a market enabling ecosystem and unlocking of millions of gigable jobs is not jobs market matching using technology platforms. 

But to the extent of the realistically available market, even if much smaller than the 90 million proposed, an approach that combines technology with feet on the ground holds promise. It has the potential to not only provide mere gig jobs, but also reasonably better paying jobs in the firms which manage the service delivery. 

There is no question that gig work has its share of beneficial effects. It could also emerge as a welcome income augmentation opportunity for those working in an increasingly wage-stagnant regular labour market. Besides, at a macro-level, for example, if physical stores are being displaced by virtual stores, those retail floor workers are now being displaced towards delivery. And as discussed, there are opportunities for higher paying jobs associated with gig economy businesses. Therefore instead of pushing back, it should be managed to maximise its benefits and limit its adverse consequences.