Will a Tight Labor Market Squeeze out the Gig Economy?

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US unemployment is at its lowest level in 50 years — an economic environment that is precisely the opposite of that out of which the gig economy was born. In the wake of the 2008 financial crisis the labor market was wide open: unemployment was high and many people couldn’t afford their high mortgages in a collapsed housing market without additional income. Enter: the gig economy. From Uber and Lyft, to now-defunct companies like Exec and Homejoy, VCs, founders, and laborers alike couldn’t get enough of the gig economy. Over a decade later, though, the future of these companies is not nearly as bright: many of them have failed to turn a profit and worker turnover rates are as high as 500%, which has contributed to high onboarding and recruiting costs.

NewtonX surveyed the gig economy market by issuing an online survey to executives at gig economy companies, investors in gig economy organizations, and recruiters for gig workers. The results of the survey show the challenges for hiring gig workers, trends in the gig economy workforce, and the solutions that gig economy leaders are looking at for periods of low unemployment.

Earlier this year, NewtonX conducted a similar study of the gig economy focusing on enterprise workers. To learn about this aspect of gig work, read the article here.

The Profitability Problem: How Gig Economy Companies Are Balancing Profits With Laborers

The gig economy has matured. Lyft is now public, Uber and Postmates have filed for IPOs, and Instacart has confirmed that it too will soon file for IPO.

Despite this maturity, the industry still faces major challenges, not the least of which is high worker turnover and low profitability (or no profitability for many companies). As VCs increasingly look for exits now that the market is ten years down the line, these issues are becoming all the more pressing.

In its IPO prospectus, Uber notes that annualized attrition was near peak levels in the third quarter of 2018. The respondents to the NewtonX survey attributed churn to three factors: the nature of the gig economy, which operates as a short-term or subsidiary engagement; limited populations (and therefore workers) in certain geographic locations; and pay.

Large gig economy companies process thousands of applications per day for gig roles — often in places with limited populations. This factor, combined with the nature of the gig — that it is often a bridge job or a short-term solution to a larger problem — has contributed to high worker churn. The average churn rate in the industry, according to respondents to the NewtonX survey, is over 100% per year, with some companies seeing up to 500% turnover. To make matters worse, the NewtonX survey revealed that the percentage of “high performers” (gig workers who treat their gig job as a full-time job) has declined over the past five years, from 20-25% to 15-20%. This has increased the need for more workers, adding to recruitment costs and turnover rates.

As companies strive to turn a profit, they end up stuck between the need to attract gig workers (at compensation rates that they’ll agree to) and the need to increase margins for profitability without losing customers.

The Solution That Companies And VCs Are Banking On

It’s no secret that many gig companies are depending on automation as a way out of the profitability dilemma. Whether it’s drones, autonomous vehicles, or sidewalk robots (read our analysis of sidewalk robot delivery here), virtually every gig marketplace (Airbnb is an obvious exception) is turning to automation as a means of lowering costs and improving margins.

The question is not, then, what the solution is. Rather, it’s a question of when the solution will become available, and whether it will offer enough cost savings to make these companies profitable within time frames that work for investors and consumers. In the meantime, gig companies are increasingly concerned over onboarding and recruiting costs, and the rate at which they are burning through populations of available workers.



About Author

Germain Chastel is the CEO and Founder of NewtonX.

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