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The Economy Looms Larger Than It Used to in Shoppers’ DecisionsDoes the Gig Economy Promote Entrepreneurship?
- By
- October 05, 2020
- CBR - Economics
The gig economy has exploded over the past decade, with companies such as Uber, DoorDash, and Airbnb matching consumers with contract workers willing to provide them with transportation, home rentals, and other services. It’s given consumers more options and convenience, and upended the taxi, restaurant, and hotel industries, among others.
But the gig economy may have another effect as well: gig-work opportunities may help people make the leap to entrepreneurship and start their own businesses, according to research from Washington University’s John M. Barrios, Rice University’s Yael V. Hochberg, and Rice PhD candidate Hanyi Yi.
To study the effect of the gig economy on entrepreneurship, the researchers looked at the entry of ride-hailing services such as Uber and Lyft into nearly 1,200 US cities and towns through 2016. Because the services entered different cities at different times, the researchers were able to get a before-and-after view of entrepreneurship in each market relative to the advent of the gig economy locally.
In those areas, the researchers find, new business registrations and Small Business Administration loans to newly incorporated businesses each rose about 5 percent after ride hailing became available. Interest in entrepreneurship, as measured by Google searches for phrases such as “how to start a business” or “how to incorporate,” rose about 7 percent.
Video Transcript
You can think of some gig work as being very personal, like Uber, where you have to get in a car with someone else. And if we come out of this pandemic being a little bit more conservative on interaction, I think it’s going to be less likely that we’re going to be getting into a random stranger’s car. It’s cheaper, but in addition to whatever I have to pay for Uber, there’s an incremental cost that the driver could have COVID-19. And from the driver’s perspective, “I could make X number of dollars by driving, but I also now increase the likelihood that one of my passengers might have COVID-19.”
Food delivery through Amazon or Grubhub, where you can grab stuff and have it be delivered to your place, you could imagine that people might have liked and been exposed to that. Whereas before, they would have had to search and find this app, now it’s become more mainstream.
You could see that that would provide opportunities for some of the displaced labor in the market, because a lot of these Uber drivers that were relying on Uber before now just switched over to doing a lot of these delivery services, helping get food to individuals and reducing the social contact of having to have everybody outside going to pick up food or going to the grocery store.
In that sense, I think that you would see [gig work] as being a mechanism to provide opportunities for individuals that might be between employment. And that was traditionally what the gig economy was. It was kind of a stepping stone for individuals changing careers, maybe going back to school, providing side income. There’s this notion of flexibility, of providing these flexible markets where individuals can partake, rather than being stuck in between full-time employment and trying to find another full-time job.
If the gig economy serves this mechanism—which, we see it in a couple of papers, in terms of the gig economy actually reducing the amount of unemployment that you partake in because it provides that gap period, where you’re actually doing work—you could think of it as also maintaining some human capital.
We don’t have as much human-capital depreciation, whereas before, you would just go on unemployment. The concern is that, as you stay home and not work, you lose scheduling, and you lose a lot of this human capital that you’re used to when you have a full-time job. That starts depreciating. You’re not used to schedules anymore. You’re not used to getting up to go to work.
And so, it makes it harder to come back into the market. Whereas in this gig, you can maintain some of that by maintaining a schedule. So it guards against human-capital depreciation.
Furthermore, the researchers write, where interest in gig work was highest, so too was the impact on entrepreneurship. To measure the take-up of gig employment in a given city, Barrios, Hochberg, and Yi used a proxy measure based on the number of Google searches for terms relevant to such jobs, including Uber and Lyft. They find that greater search activity for these terms correlated with stronger entrepreneurial effects.
Gig work may encourage the formation of new businesses by giving potential entrepreneurs a way to supplement their income during the lean times that many new ventures experience, the researchers explain. And if these entrepreneurs start a business and it fails, gig work gives them something to fall back on.
The impact of ride hailing’s entry was strongest in cities with lower income levels and lower educational achievement, according to the researchers. New-business registrations got an especially big boost from the entry of ride hailing in areas where wage growth was volatile, further underscoring that it offers insurance and a backup source of income for would-be entrepreneurs.
The effects were also largest in areas where borrowers had either especially good or particularly bad credit. In areas with lots of creditworthy borrowers, economic activity was greater, and so demand for entrepreneurs’ goods and services was greater. In areas where borrowers were poor credit risks, the gig economy was itself a source of capital to would-be entrepreneurs, making them more creditworthy or less dependent on credit.
Ride hailing doesn’t necessarily change everything about entrepreneurship, however. It doesn’t really change what kinds of new businesses are created, the researchers find, nor does it affect which parts of a city or town new businesses tend to open in—so ride hailing’s effect on new businesses isn’t simply a matter of making some neighborhoods easier to get to.
John M. Barrios, Yael V. Hochberg, and Hanyi Yi, “Launching with a Parachute: The Gig Economy and Entrepreneurial Entry,” Working paper, March 2020.
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