Our Learnings on the Gig Economy
In last week’s Economist, there was an interesting article about Ronald Coase, a 1930s British economist who pointed out a major omission in the implementation of capitalism. If we truly believe that market forces are the best way to inspire innovation and efficiency, why don’t companies and employees have a similar relationship? When employees change roles in companies or work on new projects, it’s usually because they’ve been told to do so, not because they see an opportunity for higher wages or differentiation. Companies are run more like top-down dictatorships than like free-wheeling capitalist economies.
An interesting counter-point to that are 1099 workers and the gig economy. In the gig economy (think Uber/Lyft/TaskRabbit/etc.), workers are empowered to take their labor to spot jobs wherever will pay them the most. At Hello Scout, we tried both the 1099 and W2 routes with some interesting findings.
We initially launched as a gig-economy company. We hired 1099 contractors based on their local knowledge and paid them for the hours that they wanted to work. If you only wanted 10 hours per week, fine by us. Conversely, if you wanted to work 40 hours/week, that was cool too. (Note: there’s a whole conversation here about what the law says is right for 1099 versus W2 or what is morally right, neither of which I’ll go into. I’m more interested in this as an econ thought experiment by a non-economist.)
However, after a year of this 1099 arrangement, we switched people over to W2, full-time employees. We went from a capitalist system to a centrally-controlled, top-down one. Why?
Firstly, because people who worked more hours generally provided better service than people who worked fewer hours. They learned more. They operated more efficiently. And our customers liked them better.
Secondly, because we needed more control. The marketplace was too unwieldy because it was hard to balance supply and demand (e.g. we were always struggling to fill holiday shifts).
Thirdly, and most importantly, we wanted people to innovate. This is funny because it’s the opposite of what you’d expect from a top-down system. However, what we learned is that when our team entered into a long-term relationship with us, they were more likely to think long-term. They felt (and had) ownership over the experience and the outcomes (we provided stock options, but I believe the same would have been true without those).
In the contractor relationship, we had to put very tight bounds/obligations on how people should do the role because turnover and risk of error were high. But in an employee relationship, we could have far broader job descriptions and leave it up to the team to define the best ways to get there.
At Scout, we‘ve been helped by the fact that we’ve had an AMAZING team. But the phenomenon would, I believe, prove true anywhere: the “invisible hand” of the contract labor market actually stifled innovation. For us, long-term relationships based on trust were more impactful than short-term ones based on competition. I wonder if there are other areas of the economy — like education or healthcare—where this might be true?
