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Why the gig economy could actually hurt small businesses

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On the face of it, the growth of the gig economy would appear to be good news for small businesses. Having a pool of expertise on hand that you can draw from as and when you need it has many benefits. After all, a small business can hire and fire freelancers at will. You don't need to provide them with an office, and you don't need to provide them with health insurance. You don't pay freelancers when they take a vacation either. And, if they are sick, that's not your problem; you hire another freelancer instead. All these things are true. Even so, there are reasons why the growth of the gig economy may also be bad news for small businesses. Here are some of the potential drawbacks.

The rise of the gig economy

There is nothing new about freelancing. In fact, it was the small, independent traders who dominated the early economies. Then, the industrial revolution of the 1800s brought large factories. That, in turn, gave rise to large businesses that employed large numbers of people. The factories needed the skills of independent traders. The growth of manufacturing also gave rise to the growth of larger service businesses. And so, working for a single employer became the norm.

Roll forward a few hundred years, and we have a new revolution. This time, it's the internet that is driving a change in the way that people work. Fast, affordable broadband connections have made remote working possible. It has also allowed freelancers to sell and deliver their services to a worldwide online market.

The last piece of the gig economy jigsaw to fall into place was the rise of gig work platforms. Sites like Fiverr provided a way for freelancers to market their services. Many other similar sites have followed. Some of those sites are very niche-focused. Uber, for example, provides a car share service. The Uber model is different than that of sites like Fiverr, though. Uber provides only one service, and it manages the bookings and allocates drivers to riders. Even so, Uber drivers are still freelancers. The drivers are gig workers who have no formal contract of employment with Uber, and no guarantee of work.

The gig economy is a very different type of employment market

The gig economy is unlike any employment market that we have ever seen before. Geography is no longer a barrier to work. If a person has the skills and an internet connection, they can work anywhere in the world. And they can offer their services to a global market. The global and competitive nature of the gig economy should make services cheaper. That's got to be good news for small businesses. As the gig market grows, though, it could also create new challenges for small businesses.

A diminishing pool of labour

Working as a freelancer is a very attractive proposition to some people. Freelancing provides independence, freedom, and flexibility. These are benefits that will tempt some skilled workers out of the employment market. That could lead to a shortage of skilled workers seeking conventional, full-time employment.

Increasing costs

The gig economy is often credited with reducing labour costs. Most gig economy markets, though, are very polarised. The best freelancers who are very much in demand can charge high rates. The less qualified workers who may struggle to find work are the ones who are charging lower rates. There are no geographical barriers to finding work in the gig economy. The market is worldwide. The demand for the best gig workers is very high. So, they can charge more for their services than they would in full-time employment.

More competition

The gig economy is expanding into different sectors. Small businesses are likely to soon find themselves competing with freelancers. Uber is a good example of this. Local taxicab businesses now compete with Uber for both drivers and customers. In the future, small businesses in other sectors will face similar competition.

The disadvantages of using gig workers

For one-off tasks, gig workers are the perfect solution for small businesses. If a small business wants their website upgraded, for example, a gig worker would be ideal for the job. A gig worker is likely to be cheaper than hiring a web development company. And, of course, a one-off job of this nature would not warrant hiring an employee.

Using freelancers for on-going work, though, is not always an effective solution. When you hire an employee, you get loyalty and continuity. An employee will have some commitment to their employer. They will grow with the business. An employee will also learn how the business works. They will, in time, need less supervision and management than a freelancer would. Using gig workers may appear to be cheaper in the short term. The time needed to train and manage each gig worker, though, could cost more in the long run.

The potential fall of the gig economy

The gig economy is growing, and in some sectors that is a positive thing. In other sectors, though, the writing is already on the wall for this type of employment. There have been calls in some parts of the world for Uber drivers to get guaranteed hours, paid sick leave, and vacation time. People, it would seem, want all the freedoms of freelancing, but none of the risks. If Uber and similar sites offer employee benefits, they will want something in return. They will want full-time employees with contracts of employment. In other words, they will have to abandon the gig economy and join the mainstream.

A gig for your thoughts?

In the short term, the gig economy could be a threat to some types of small businesses. Looking forward to the future, though, market forces will level things out. The gig economy is an attractive proposition to some people. Even so, most people also want the security that conventional employment offers. Once a gig worker platform reaches a certain size, it will come under pressure to become a conventional employer. For that reason, the gig economy is here to stay, but it will never replace the conventional economy.

Tom Popomaronis, VP, Innovation, Massive Alliance (opens in new tab)

Tom Popomaronis is a digital executive and a technology change agent. He is VP, Innovation at Massive Alliance and is a leadership contributor at CNBC Make It & Entrepreneur Magazine.