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In 2004, Dynamex Operations West, a California-based courier company, suddenly reclassified its permanent full-time employees as independent contractors, depriving them of entitlements such as minimum wages, overtime, paid sick days and workers compensation. The reclassified drivers had to use their own vehicles and pay for all expenses including petrol, tolls and insurance to earn a contracted delivery fee that amounted to a wage cut.

Two drivers fought back. A putative class action began in 2005 that last year prompted California’s supreme court to make it harder to classify workers as independent contractors. To categorise staff as such, a company must show a person is “free from (its) control”, works “outside” its core operations and has an “independently established trade, occupation or business”. In September, the Democrat-controlled government of California wrote these tests into law under Assembly Bill 5.

AB5, as it is known, which exempts many types of independent contractors, is of significance because a dispute within a traditional business is serving as a means to attack the employment model of the ‘gig economy’ companies that didn’t exist when the Dynamex dispute began. These are the online labour marketplaces pioneered by ‘ride hailer’ Uber Technologies that match people to short-term jobs, or ‘gigs’.

Due to companies such as TaskRabbit (like Airtasker in Australia) that auctions handymen, Freelancer.com that hires out creative talent and Uber and Lyft that sell rides via app, about 6.9% of the US workforce is now classed as independent contractors – many of whom are gig workers – while about 7% of Australian workers find gigs through digital platforms.

To admirers, the giganomics labour model lets people operate remotely, set flexible hours, work for multiple employers and promote their services via ratings. Many gig workers are no doubt happy with their earnings and conditions and the broader opportunities they have to find work. But to critics, the gig model is a form of ‘feudalism’, a ‘poverty trap’ that weakens worker rights and conditions and undercuts wages, thus further tilts the labour market in capital’s favour. Another criticism is that the gig labour model allows platforms to skirt regulatory controls when they move beyond the tech industry – think how app-based companies have upset transportation by bypassing regulations.

For all its happy customers and no doubt many willing and well-paid workers, giganomics is vulnerable politically because it comes with five social costs. The first is that giganomics can harm established competitors in non-tech industries that are bound by regulations that gig companies can ignore. The second is the gig economy can hurt government finances through lost taxes (especially payroll taxes) and higher welfare payments to struggling gig workers – California estimates the cost to be US$7 billion a year. Third, the spread of gigging is blamed for reducing worker income and making it more insecure. Stemming from that are the fourth and fifth costs; lower and less-stable income weakens the consumption that drives economies and deepens the inequality centred on stagnant wages and record profits that is roiling politics across the developed world.

These drawbacks are prompting a regulatory and worker-based backlash against the gig economy that might only be getting started. More US states are preparing laws similar to AB5 and California and other states are looking at ways to help independent contractors unionise and bargain collectively. The result could be some solution whereby gig workers are afforded better pay and some protections while keeping their flexibility. At the same time, the scrutiny of the gig economy could broaden into a push back against contracting and outsourcing more generally to ensure the rising number of workers who lack permanent full-time employment status enjoy a fairer and more secure share of today’s riches.

To be sure, the gig labour market is here to stay – Australia has an estimated 100 platforms offering work and that number will no doubt grow. In some ways, it’s unfair that gig companies such as the ride hailers are targets because they are fixing flaws in regulated markets (such as the lack of taxis at peak times due to licence restrictions). Efforts to tame the model could flounder. In the US, a key federal body recently ruled that gig workers are independent contractors who can’t unionise, which means the legislative fight against the gig economy must be at state level – and the push against gigging is largely restricted to states where the Democrats are in power. Car-booking companies could succeed in overturning California’s law (even though they say it doesn’t apply to them because they are tech platforms where people auction rides, not taxi companies) because it could boost their labour bills by 30%. AB5 is being questioned by many independent contractors who don’t want to be covered by the law. A jump in jobless rates would impede efforts to help workers. No sure-fire proof exists that gigging has suppressed wages share in output, or even that app-based companies have increased the percentage of independent contractors in the US workforce.

But the zeitgeist focused on inequality says otherwise. Giganomics is disruptive enough to promote a counterattack, especially when many allege that gigging tilts the labour market further against workers at a time when profits are at record levels.

Evasive model

Bill Phillips (1914-1970) was a New Zealander who in 1958 came across more than a century’s worth of data on UK unemployment rates and wages growth that allowed him to test his hunch that economic growth influences inflation. The result of his “wet weekend’s work” was a plotted relationship that formed the first half of a U that showed an inverse relationship between unemployment and wages growth.

What subsequent economists referred to as the Phillips Curve proved a useful framework because it displays the short-term trade-off between economic growth and inflation that policymakers must make. Until now, it seems.

The analysis appears redundant because in many countries wages growth is low even at full employment. Wages growth in the US, for instance, has stayed mostly below a 3% annual pace even though the US jobless rate has fallen from 10% in 2009 to a 50-year low of 3.5% this year.

Wages growth is contained these days largely because politics tilted right during the past four decades, to exacerbate capitalism’s natural bias to reward capital over labour. Backed by government, businesses fought unions and forced workers onto individual contracts. Temporary and contract work rose as a result as did unpaid overtime. Over time, labour’s share of GDP fell to 43% of output in 2017 from a post-World War II peak of 52% in 1969. (Labour’s record low share of GDP was 42% in 2011.)

Critics of the gig model say tech platforms exacerbated wage-lowering practices. A US study in 2018 found Uber drivers only earn an income of U$9.21 an hour after costs, below California’s minimum wage of US$12 an hour for a company of Uber’s size (26 employees or more) – other studies show many gig workers on similar low pay.

In an age of growing angst about inequality centres on low wages growth, the gig economy is likely to attract more scrutiny. In the US, Congress is examining ‘transportation network companies’ and states beyond California are looking at the gig economy model more generally. Illinois, New York, Oregon and Washington states have indicated they might introduce AB5-like laws while Democratic presidential candidates have promised to do this at a federal level. California’s Democratic Governor Gavin Newsom is marshalling to help independent contractors unionise, bargain collectively, earn more and have more say over conditions to overturn “the hollowing out of our middle class that has been 40 years in the making”. There’s political gain in such steps. San Francisco voters, in a 68%-to-32% result, in November approved a congestion tax on shared rides. In Europe, to empower gig workers, the EU is thinking of changing competition laws that prevent the self-employed from collectively setting prices.

If momentum against the gig economy were to build, flexible labour practices might be introduced to protect gig workers that would diffuse the labour model’s controversial aspects. At the same time, the campaign could broaden into a fight against the casualisation of the workforce beyond app-land, to reverse what companies such as Dynamex have done over recent decades.

Published by Michael Collins, Investment Specialist, Magellan Group