Economic Diversity As A Solution To Uncertainty: Why Self-Employment Matters During Recessions

*This blog post is part of a series from Tech4America on the future of work

As the United States descends into pandemic-fueled economic distress, what lessons can be learned from how the United States bounced back from its most recent recession in 2008? After reviewing the literature, I think one of the key takeaways is that in order to make workers resilient to downturns we must focus on economic diversity and self-employment. People need to diversify who they work for, when they are available for work and the industries in which they work. Flexibility is key.

The reason self-employment appears to be so crucial is that recessions are really about uncertainty; economic contraction isn’t just a temporary reduction in spending, but a wild, unpredictable restructuring of industries and labor. After 2008, jobs shifted from rural to urban areas, manufacturing jobs accelerated into the service sector, businesses replaced routine labor with machines and increased education requirements for jobs to operate the new technology.

This new recession will follow that long established trend. During the lockdown, grocery stores were crushed with unexpected swings in demand, rapidly hiring freelance security guards to man doors and delivery drivers to help older residents who couldn’t leave their homes. At the same time, business hiring was frozen and many will likely be turning to freelancers instead as the economy unsteadily creeps open.

“Being a freelancer has immensely helped my income curing the COVID-19. It has made my savings much more stable. I do not know where I would be financially without this income.”, one freelancer told me, as part of a recent series of deliberative polls that I’ve done of independent contractors (contact me for methodology details).

An anecdote to frame the evidence

Before I run down the evidence on self-employment and recessions, there’s an example that sticks out in my mind: Rick Thomas* works at a car manufacturing plant in Kentucky. But unlike many of his colleagues in manufacturing, he told me he wasn’t stressed out about unexpected plant closings, because over the years he had developed a side hustle in the travel agency business, which he can do from home as he helps friends in referrals plan their next big vacation.

“If Ford calls today and says ‘we’re closed’, I’ll be good tomorrow’. he told me. “I could retire from Ford and do this for the rest of my life”.

That is, Thomas had found a way to build a safetynet in a service industry that I had thought was decimated by online commerce by becoming part-time self-employed.

The evidence

There’s been a lot of anecdotes thrown back-and-forth over whether self-employment is good or bad for economic stability. So, what does the evidence say?

“A higher share of self-employed workers in a county was unambiguously associated with greater resilience,” wrote economics professor Stephan Goetz, in an international comparison of how different regions bounce back during recessions.

Goetz gathered regional data on both the depth of unemployment and what percent of workers eventually landed back in a job. Overall, he found that regions with a greater diversity of industries are less negatively impacted, but it was self-employment that had the biggest positive effect. That is, my interpretation is that self-employment and entrepreneurship may be a necessary factor in true economic diversity. Towns that rely on one big employer or workers that can only work in one industry don’t really have a lot of options.

But, as good as this study is, I find it lacking. Most public data sets rely on large regional variation to tease apart causality when it comes to self-employment and how much people make during economic distress. It doesn’t help us know what exactly is going on with people’s individual lives.

The private sector ultimately has some of the highest quality data there is, but perhaps the absolute cream of the crop data comes from private banks, which can measure at the individual level peoples’ wealth and how they respond to negative economic shocks.

One of the best studies I’ve seen on individual experience comes from the JP Morgan financial institution. JP Morgan doesn’t know whether someone gets paid as a freelancer or as a W-2 employee. But, it can infer this when a client gets a check from job platforms that primarily engage with independent contractors. So, if a user has regular checks from a company such as Uber or Lyft, it’s likely that they are a gig worker.

JP Morgan found that on average gig workers had less economic volatility than non-gig workers, as job platforms offset a 14% dip in non-platform income with an additional 15% of income. Just as important, JP Morgan found that 86% of income volatility came from within the same job, which means folks with regular jobs still experience instability.

The report concludes:

The Online Platform Economy adds an important new element to existing labor markets, however. Simply put, landing a platform job is easier and quicker. Individuals can, and do, generate additional income on labor platforms in a timely fashion when they experience a dip in regular earnings. This is a potentially far better option to mitigate or weather volatility, if the alternatives are to constrain spending or take on additional credit.

Now, skeptical readers may point out that self-employment is associated with higher income volatility. How does this research square? Well, most studies of income volatility come from self-reported surveys, asking people if they made more or less than they usually do. Somebody who works in the gig economy may report that some months they work more than others and so they’re likely to have bigger swings in income.

But, banks measure not just income, but total savings. As an example, let’s say a driver works really hard in the month of November to pay for a medical expense in the month of December. A survey of their income would make it seem like this driver had lots of financial distress, even though the added income was used to offset a coming expense.

While the overall evidence seems positive for self-employment and economic distress, how do we square this with the fact that there are so many gig workers who report experiencing economic instability?

To answer this question, I ended up looking at a few data sets that track people for how long they’ve been working in an occupation. The finding was that income in self-employment takes time to develop. It can take three or more years for some workers, especially those who do self-employment full-time, to figure out the best way to earn money.

Just speaking personally, when I first started out as a writer, I had inconsistent, entry-level earnings that were meaningful, but still required my regular income as a grad student. Over about three years, I honed my skills to the point where I was making a decent salary. And even when I landed a job as a W-2 journalist, I still freelanced on the side, which became critical when I transitioned between employers.

The common theme that different types of economic distress seem to have, whether it’s a recession or a mass layoff, is uncertainty. Employership is a particular type of working arrangement that is best suited to times when companies know what demand will be. This pandemic will be anything but predictable and it’s likely that a large percentage of workers will rely on self-employment to manage during the transition.

*Name changed for anonymity.

**View my statement of conflict of interest here.