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Box 4. The income question: Are independent earners becoming a two-tiered workforce?
While the evidence is mixed, it appears that individuals with skills that are in high demand can boost their
income by becoming independent. But it may be a different story for workers with widely available general
skills. Even some workers who have carefully cultivated skills over time may experience a difficult transition to
independent work if they are forced into it because they work in traditional industries that are being disrupted
(such as newspapers or manufacturing, for example).
Some “free agents” in our survey leave traditional jobs precisely because they can make more money as
independent contractors than as payroll employees. One study found that the self-employed in Germany
have considerably higher average monthly earnings than regular employees.
1
MBO Partners’ annual survey
found that 47 percent of full- and part-time independents report making more money working on their own
than they would in a traditional job. The Freelancers Union reports that three-quarters of freelancers earn
more than they did in their previous traditional jobs within the first year of leaving.
2
However, it is less clear
whether these studies are examining gross income or net income that excludes costs of doing business and
benefits, such as employer-subsidized health-care and retirement benefits.
Workers in unskilled, generalist positions face low wages, whether in independent work or traditional
jobs—but their lack of economic security can magnify the challenges of handling the ups and downs of
independent work. One study in California found that even controlling for the type of occupation as well as
for demographics and English proficiency, workers on temporary contracts made about 18 percent less per
hour than non-temporary workers. The researchers also found that temporary workers were twice as likely to
live in poverty, receive food assistance, and rely on Medicaid.
3
Whether digital platforms amplify or reduce downward pressure on wages is unclear. On the one hand,
they could exacerbate this issue by forming large pools of available labor and intensifying competition that
pushes wages down. A recent study of US workers on Amazon’s Mechanical Turk platform found that they
were more educated than the population at large, but only 8 percent were making more than $8 an hour.
More than half made less than $5 an hour, which is below the federal minimum wage.
4
Some of this may be
caused by creating global pools of labor that expose service workers in advanced economies to competition
from workers in developing economies who are willing to work for less, but even when that is not the case,
digital marketplaces can drive down prices. This phenomenon occurred for freelance writers over the past
decade, for example, with the advent of online “content mills” that farm out assignments for short articles at
fees far below the industry standard. Price competition is positive for consumers of services, but it could lead
workers—especially those who lack differentiated skills or experience—into a low-income trap.
On the other hand, digital platforms also enable richer information signaling that can help workers set
themselves apart and potentially increase earnings. One study tracking 10,000 workers found that those
in occupations such plumbing, carpentry, and moving could command higher wages through on-demand
digital platforms rather than traditional channels—but the opposite was true for graphic design, writing, and
editing.
5
Although commissions are typically set by intermediaries, near-zero marginal costs make it possible,
in theory, for workers to switch seamlessly from one intermediary to the other. The presence of competitive
intermediaries in a given market could potentially enhance the power workers have over wages.
The evidence on whether independent work enables higher incomes or lowers wages is mixed. In our
survey, it appears that household incomes are lower on average for independent workers than for traditional
workers. However, it is not clear whether lower household income has driven workers to earn income through
independent work or vice versa. Other research finds that independent work enables some people to earn
more than in traditional employment. More research is clearly needed to understand the effects on incomes
and wages over time.
1
Christian Hopp and Johannes Martin,
Self-employment and earnings: Evidence for Germany
, German Economic Association of
Business Administration discussion paper number 14-19, May 2014.
2
Freelancing in America: 2015
, Freelancers Union and Upwork, October 2015.
3
Miranda Dietz,
Temporary workers in California are twice as likely as non-temps to live in poverty: Problems with temporary and
subcontracted work in California
, UC Berkeley Labor Center, August 2012.
4
Paul Hitlin,
Research in the crowdsourcing age, a case study: How scholars, companies, and workers are using Mechanical Turk, a
“gig economy” platform, for tasks computers can’t handle
, Pew Research Center, July 2016.
5
Arun Sundararajan, “Will the on-demand economy raise global living standards?” World Economic Forum online, September 9,
2015, available at www.weforum.org/agenda/2015/09/will-the-on-demand-economy-raise-global-living-standards/.
94
McKinsey Global Institute
4. Making independent work a win for all stakeholders
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