Independent work: choice, necessity, and the gig economy


Box 4. The income question: Are independent earners becoming a two-tiered workforce?



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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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