Are More Independent Contractors a Good Thing for the Economy?

We’re moving toward an era that favors independent contractors over full-time or part-time employees. Known informally as the gig economy, this system encourages people to work as they please for any number of different companies, in exchange for a per-project or per-hour rate, rather than a running salary.

There are advantages and disadvantages to this system, both for employers and employees, but what’s most important is the overall impact on the economy. So are more independent contractors a good thing for economic development?

Incentives for Work

Let’s start by taking a look at the incentives for a person to perform quality work. In a full-time employment situation, an employee feels they must comply with the minimum standards necessary to ensure the contentment of their employer; in some situations, they may have more wiggle room because they have group negotiating power or because they’re enrolled in a long-term contract. Independent contractors may feel even more compelled to perform quality work because their clients are less guaranteed to continue working with them. In either condition, industry demands will typically dictate the level of experience necessary to complete a job. For example, if you’re interested in repairing the foundation of your home, it’s possible to find an independent contractor or a business with full-time employees who can get the job done correctly.

The difference is, a business with independent contractors may have workers more committed to getting the job done quickly and efficiently. That’s because contractors are frequently paid on a per-project basis; rather than being paid the same salary, regardless of how much work they do, they’ll be paid based on how much they get done. This provides more opportunities for higher pay for employees, and practically guarantees that more work will get done, making independent contractors a win-win for employers and employees alike.

The Benefits Problem

However, incentives to work aren’t the only factor worth considering. In most independent contractor relationships, contractors aren’t compensated with long-term benefits like health insurance or retirement programs. This saves the employer money but puts an additional burden on workers. This arrangement also puts more stress on workers, especially if they don’t feel like their position is secure. Ultimately, this can be counterproductive to a healthy, thriving economic environment.

Entrepreneurship, Flexibility, and Control

It’s also important to consider the perks of entrepreneurship, flexibility, and control for independent contractors. Rather than committing to a strict schedule or 40 hours a week, contractors have more control over their schedules and commitments. For example, ridesharing services like Uber and Lyft allow their drivers to set their own schedules and drive as little or as much as they want. The lack of benefits and consistency may be problematic for someone seeking stability in a long-term career, but for a new parent who just wants a bit of extra cash on the side, it’s the perfect opportunity.

In this specific area, it seems the best force for long-term economic development is a combination of full-time, part-time, and flexible contracting opportunities. That way, the greatest number of people are able to contribute the greatest amount of productive work, and earn compensation in line with their contributions.

Pay and Negotiation

It’s hard to discuss the pay element for independent contractors, in part because contractors in different industries are going to earn wildly different rates. Contractors definitely have less negotiating power with a single employer, but this is balanced by the fact that they can easily have a working relationship with multiple employers; if an employer develops a reputation for treating or paying its workers unfairly, those workers will leave and find a different opportunity.

Contractors getting paid less can have both a positive and negative effect on the economy. Workers with less money will be spending less in the economy, but the fact that low-pay positions are available means more people will have the opportunity to start businesses for less initial capital. In other words, while some workers will be participating less actively in the economy, more entrepreneurs will be incentivized to create new jobs and new market opportunities. It’s uncertain whether these effects could balance each other out, or if one will be more impactful than the other.

The Bottom Line

Almost every point of independent contractors is balanced with both advantages and disadvantages for the economy—almost purely hypothetical ones, since we don’t have much long-term data to work with to form our conclusions. Even if we had more data on how independent contractors function in a largely gig-based economy, it would be hard to form a definitive conclusion. The most educated and experienced economists in the world still understand relatively little about how economic growth manifests, and that’s due to the fact that the economy is an enormously complex system, with built-in mechanisms to sustain itself.

If contractors are good for the economy, there will naturally be more opportunities for them to flourish and drive economic growth, and if they’re bad for the economy, they’ll gradually subside. Like most economic problems, it’s just going to work itself out in time.