In recent years, the gig economy has become a lightning rod for political debate. Lawmakers and activists warn that Uber drivers, online freelancers, and other contract workers are trapped in a precarious labor market—competing against one another for jobs, lacking benefits, and excluded from basic workplace protections.
California has led efforts to regulate this space, passing legislation that reclassifies many freelancers as employees, with the stated goal of improving their economic security.
But emerging research tells a different story. Far from being powerless, gig workers on digital platforms often earn substantial value from their work. What’s more, new regulations designed to “protect” them may actually reduce their opportunities and lower their earnings.
Globally, more than 160 million workers are registered on online labor platforms that match short-term tasks to independent contractors. These jobs range from graphic design to tech support and translation. It’s true that many more workers are available than there are jobs at any given time, which has helped fuel concerns about excessive competition. But this recent study found that this surplus of workers doesn’t drive earnings to zero. In fact, despite what might be viewed as oversupply, workers in the study capture nearly half of the total economic value created in each transaction.
That value, or “surplus”—the difference between what clients are willing to pay and workers’ opportunity costs—is about $4.24 per hour worked. Roughly $1.97 of that goes to the worker, and $2.27 goes to the person hiring them. These are net benefits above each party’s outside options—how well off they’d be if the job didn’t happen. And these estimates don’t include just the lucky few. Even when accounting for applications that don’t result in jobs, the researchers find that workers’ net gains from participation remain clearly positive.
Why? The answer lies in how people search and match on these platforms. Clients don’t evaluate hundreds of workers. On average, they considered just 18 applicants before deciding who to hire. That means freelancers aren’t locked in a race to the bottom—they face limited direct competition. Moreover, clients treat workers as differentiated. Skills, experience, and responsiveness matter. 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.
The researchers estimated what would happen to these workers if they were subject to payroll taxes, as are regular employees. Unless the clients and workers benefit from the tax, the number of posted jobs falls, as does the hiring rate. That means both workers and clients end up worse off. Total surplus falls.
None of this implies the gig systems are perfect. But it suggests that some presumably well-intentioned reforms may miss the mark. Consider another study examining California’s Assembly Bill 5 (AB5), which requires many independent contractors to be treated as employees. Under a strict “ABC test,” businesses must prove that contractors are not under the hiring company’s control, that they work outside the usual course of the business, and that they operate as independent businesses in their own right. Such proof is costly to produce. So unsurprisingly, the study found that AB5 decreased employment nearly 5 percent in the affected occupations—shrinking, not expanding, opportunities.
None of this is to suggest gig work is for everyone, or that it should be free from regulations that help markets work. But we should recognize that many freelancers choose flexibility and independence for good reason. According to surveys, they carefully weigh their bids based on going rates and competition. They understand the tradeoffs. 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.
As policymakers debate how to shape the future of work, they should let data—not assumptions—lead the conversation. Freelancers deserve regulation that protects their freedom, not one-size-fits-all rules built for a different era.
The post The Gig Economy Benefits Freelance Workers—Until Regulation Steps In appeared first on American Enterprise Institute – AEI.
