As described in the Mini-Case “The Gig Economy,” has the gig economy increased or decreased the extent of vertical integration? Explain briefly. What is the role of technological progress and what is the role of government policy in the growth of the gig economy?

The Gig Economy

Traditionally, most firms vertically integrated by hiring workers instead of contracting  with others to provide labor. The gig economy is disrupting this laboremployer relationship. In a gig economy, temporary jobs are common and firms contract with independent workers for short-term activities. For example, delivery services such as FedEx and UPS contract with extra temporary workers during the December holiday rush. Other gig jobs include driving for Lyft or Uber, freelance writing, and employment through temporary work agencies. The Federal Reserve reported in 2018 that nearly one third of adults participate in gig work, either as their primary employment or to supplement other sources of income.

Part of the reason for the recent growth of the gig economy is that computers and smartphone apps have greatly reduced the transaction costs of short-term contracting, as when someone orders a Lyft ride. By contracting with temporary workers as needed, firms achieve greater flexibility and are able to avoid overhead costs such as providing work space and human resources services.

In addition, a major reason firms like using independent contractors is that the firms avoid having to pay half of the Social Security and Medicare taxes, which are 15% of income, as they must for full-time employees. They also avoid paying for unemployment insurance and workers’ compensation in case of injury. Thus, government insurance requirements that apply only to full-time workers are a major cause of the trend toward gig employment.