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analysis:economics:freelance_economy

The Freelance Economy

Since about 1980, there has been a trend in developed countries toward increased use of independent contractors (freelancers) instead of full-time employees. This coincides with the availability of cheap networked computers. The standard explanation for this trend, that it “reduces overhead costs”, is clearly an oversimplification, since if you look up advice on how to price your services as a consultant or contractor, the first advice is “figure out your overheads and add them in.”

The advantages for a company of hiring exactly the labor they want, exactly when they want it, are so obvious that economists have had to go to some effort to explain why the concept of full-time employment exists at all, see Theory of the firm. The basic conclusion is that hiring on need has overheads and risks too, and that companies have to balance these tradeoffs. Will you hire some guy off of the street to run your multi-million-dollar metal-bashing machine? It may not be a highly skilled job, but if he's too stoned to push the stop button when something goes wrong, then those few dollars you saved start to seem like a pretty foolish economy. One part of the answer lies in the fact that many people prefer the security of a regular paycheck, and will accept working for a lower hourly rate in exchange for avoiding the risk of being self-employed.

Especially in the US, another way that freelancing reduces costs is that it becomes the worker's responsibility to pay for medical insurance, to save for retirement, and to accept the lost income of taking vacation time. These are things which are hidden in the “benefits” portion of the traditional full-time employment package, concealing their real costs. It is likely that freelancers reduce their consumption of benefits once they pay for them directly, which may or may not be to their long-term advantage. It's certainly easier to save for retirement when your employer sets up a plan where they money disappears before it ever gets into your bank account.

As well as whatever genuine productivity benefits may come from matching workers up to needs, it is clearly also true that tax and labor regulations in developed countries indirectly encourage employers to favor contract workers. When you see unskilled workers such as janitors being paid as contract workers, this is probably the main reason. Contract workers often aren't covered by labor regulations, and the responsibility for paying taxes is shifted to the contractor. Some taxes may be avoided entirely, and it is also much more difficult for the government to make sure that all those independent contractors aren't padding their business expenses or hiding income.

In large corporations with centralized management there are comparable organizational incentives to the use of contract workers. Full-time employees often have to be approved by management at the main office, and by an independent human resources department. When one division of the organization has work that they need done, this central management is a nuisance. Often this can be avoided by hiring a contractor.

It's a common Story among freelancers that they felt forced into the decision, and were afraid at first, but came to value the freedom to work whenever and however they wanted. So is freelance work exploitative or liberating? It depends. On one hand, it's a solid principle of positive psychology that people tend to adjust to whatever comes their way, and find the silver lining in the cloud. This is what Daniel Gilbert refers to as the “psychological immune system” in Stumbling on Happiness. Since people who have become paralyzed will say often that it was the best thing that ever happened to them, this pattern of reluctant enthusiasm in freelancers is somewhat suspicious. On the other hand, there are quite a few people who do genuinely value the chance to get off the Hedonic Treadmill, to work less, consume less, and have more time to do whatever they want to do. See for example http://www.mrmoneymustache.com/.

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analysis/economics/freelance_economy.txt · Last modified: 2016/03/01 09:46 by ram