Some thoughts on the gig economy

The Ken has a very good article which argues persuasively that the “VCs and techies are turning India to a nation of hired hands”. It focuses on e-commerce and hyperlocal firms (Amazon, Flipkart, Swiggy, Zomato, Blinkit, Zepto, Bigbasket etc.) that employ 20-30% of the country’s 11.2 million gig workers. 

Zomato, Swiggy, logistics firm Delhivery, and beauty-and-lifestyle e-tailer Nykaa have a combined market value of $40 billion. Sure, all these companies have great tech chops, brand equity, and sizeable operations. But their appeal boils down to one thing: a steady supply of low-paid packers and riders. Take that away, and the magic disappears… You pay for the privilege of not having to rub shoulders with those of lesser means. Either you believe your time is better utilised elsewhere, or parting with a few hundred rupees isn’t going to break the bank even if you have nothing better to do.

Gig economy work has emerged as one of the main job creators at a time when formal sector job creation has been weak. As the article estimates, India produces 1.5 million new engineers from 8 million graduates, of whom only four in ten are employable, and only 10% will actually get jobs. 

Whether we like it or not, the gig economy is here to stay. At a time when jobs at the lowest end of the formal labour market are scarce, they are a major source to absorb the millions joining the workforce each year. However, the emergence of the gig economy as a major source of incremental job creation raises several concerns. This post examines some of them. 

The fundamental idea behind the gig economy is paying a price for convenience and time. Those who prefer greater leisure and are time-poor exchange time with time-rich people for a price. It involves the outsourcing of the regular activities that people do in their daily lives - cooking, shopping for groceries and vegetables, buying milk, owning a car and driving, running errands, doing small home repairs, dog walking or pet minding, standing in a queue, etc. Some people prefer to avoid the hassle associated with these activities and save on the time required. 

This raises the question of how big this market is. How many Indians can afford the price for such outsourced work?

For a start, since for the vast majority of Indian households, the marginal value of the rupee is very high and time is very low, they are unlikely to pay a premium, even a small premium, to save it. Further, since Indian customers are notoriously (for businesses) price-sensitive, the margins available to businesses on all these activities will be very small. Finally, the Indian consumption class for such kind of services is too small to be able to build several large and profitable businesses. Therefore, the gig economy firms serve the top end of the market, far less than 10% of households.

Then, there’s the question of the economic productivity associated with such sectors. How much productivity impact do these jobs have on the economy?

I cannot think of many direct productivity improvements associated with these jobs on gig workers themselves. The scope of these jobs is too narrow and limited to provide opportunities for the workers to improve productivity in any meaningful manner, nor for the employers to invest in their human capital. Besides, there’s very little space for likely occupational mobility for an Uber of Swiggy driver or Amazon warehouse worker. 

For sure, there are some productivity improvement opportunities. The companies themselves may invest in IT systems and management techniques to improve their logistics; and the users would use their time saved in other productive pursuits. Both are likely to be limited, given the nature of these activities and the smaller size of the Indian market. 

Some of the market segmentation is straight out fad. Consider the current craze about quick-commerce and hyper-localisation. Or the segmentation of e-commerce among different categories of products or that of clothing e-commerce firms among different categories of consumers. Or the emerging segmentation in cooked food business. I struggle with their addresseable markets and their likely productivity improvements. 

Further, such market segmentation is perhaps at its highest in India. We must introspect whether this is the kind of innovation India needs. 

In this context, I want to make the distinction between the gig economy and those like outsourcing and off-shoring. Unlike the former, the latter involves genuine productivity improvements. In fact, the basis for outsourcing is that these works are done more productively and efficiently by someone else with a comparative advantage. It’s a genuine productivity exchange. Gig work, as discussed above, is largely about intermediation based on time and convenience arbitrage. 

Then, there’s the issue of resource misallocation. Large amounts of scarce risk capital are being burnt on the gig economy firms. By some estimates, since 2010, over $20 billion or 13% of all tech funding has gone into gig work startups (multiply this if you add the investments made by Amazon, Walmart etc.). Some of the best human resource talent (IT engineers, product architects and managers etc.) are being lured by firms and startups who are essentially engaged in some form of low-skilled time and convenience arbitraging. 

There are also ethical and legal aspects. The gig workers are the real body-shoppers, where time-rich people lend their time and bodies (and some basic universal skills) to time-poor people. And when you have large companies as platforms that use a technology that lends to network effects and high entry barriers and are engaged in continuous iteration to improve efficiencies and lower costs, it’s only a matter of time before gig jobs become an exercise of labour exploitation. 

On the legal side, we know about the independent contractor-employee debate. The lop-sided employee-employer relationship, coupled with the business entry barriers and the abundance of cheap labour supply, means that wage repression and worker exploitation are inevitable, thereby necessitating regulation, especially on the labour side. 

It was only natural that a market emerged under unregulated or loosely regulated conditions. But now that the market is massive and mature, it’s only appropriate that it get appropriately regulated.

Finally, there’s the economic impact of such sectors. In a very short time (less than a decade), the gig economy has come to employ more than twice the number of workers employed by the software industry, which is nearly half a century old. It’s perhaps the single largest job creating market segment. 

As I have blogged on numerous occasions (this, this, this, and this), sustained high growth requires broad-based economic growth brought about by the creation of productive jobs that pay well. The overwhelming majority of gig economy jobs have a take-home pay in the range of Rs 15000-20000. Their wages have a high level of stickiness in a labour market overflowing with new entrants who face an acute deficiency of alternatives. 

Financially, the gig workers belong to the category of labour that includes construction labour, security guards, and household help. All of them pay in similar ranges, have limited occupational mobility, and are characterised by low skills and productivity. Given that the vast majority of these jobs are in the urban areas, they are hardly the kind of incomes required to support meaningful non-subsistence consumption.