Small Business Labs

America's Affordability Crisis Driving Growth of Gig Work

The Atlantic's The Great Affordability Crisis Breaking America covers how the rapid rise in the prices of housing, healthcare, education and childcare and their impact on Americans.  Key quote:

In one of the best decades the American economy has ever recorded, families were bled dry by landlords, hospital administrators, university bursars, and child-care centers. For millions, a roaring economy felt precarious or downright terrible.

Hyperbole aside (the economy hasn't been roaring, it's been growing moderately; "bled dry" is also a bit much), we agree that these costs are leading to greater levels of financial stress and instability. 

Coincidently, last week the McKinsey Global Institute released The New Social Contract in the 21st Century,

This report covers much of the same ground as The Atlantic article, but they report their findings more clinically. Key quote:

Among the findings: while opportunities for work have expanded and employment rates have risen to record levels in many countries, work polarization and income stagnation are real and widespread. The cost of many discretionary goods and services has fallen sharply, but basic necessities such as housing, healthcare, and education are absorbing an ever-larger proportion of incomes. Coupled with wage stagnation effects, this is eroding the welfare of the bottom three quintiles of the population by income level ... 

The report chart below (click to enlarge) shows the changes in U.S. consumer prices by category.  It is indexed to the overall inflation rate.  

McKinsey didn't include childcare in its report. But as The Atlantic article explains, childcare costs have also grown at a much faster pace than overall inflation.  

As we've pointed out in the past, growing levels of financial fragility mean more people turn to gig work to supplement their income - especially if they face a financial shock. 

Given the cost increases for non-discretionary items like housing are likely to continue outpacing inflation (and wage growth), it's likely more Americans will need to turn to gig work to make ends meets and/or deal with financial hardships.

Freelancers and Financial Well-Being

One of the ongoing questions around independent/gig work is its impact on the financial well-being of independent workers (freelancers, gig workers, self-employed, etc.). 

To better understand this issue, a series of financial well-being questions were added to the MBO Partners State of Independence study survey this year (Emergent Research works with MBO Partners on this ongoing study).

The new questions included a set developed by the U.S. Consumer Financial Protection Bureau (CFPB), which the CFPB uses to create an individual’s financial well-being score.

This score provides a standard metric that allows comparisons of financial well-being across individuals or groups.

The chart below (click to enlarge) is from the study's research brief, The Financial Well-Being of Independent Workers.

It shows that, on average, independent workers and those with traditional jobs report similar levels of financial well-being. The CFPB's 2017 study also had similar findings. 

However, as the research brief points out, "average scores don't tell the whole story."

Although the averages are the same, the score distribution for independent workers is wider than the distribution for traditional jobholders. 

In other words, a greater percentage of independent workers have both relatively higher and relatively lower scores than traditional jobholders. Key quote on what this means:

One of the broader findings of the MBO Partners SOI study series is that independent workers with in-demand skills and a tolerance for the risks associated with independent work are thriving. The well-being scores from this study reinforce this.

But the scores also reinforce the study findings that independent workers without these attributes ... often struggle financially.

See the research brief for more details. 

The Growth of Side Gigs

That side gigs - part-time or occasional work to supplement income - have become more common is hardly new news. Nor are the reasons behind the growing number of Americans with side gigs.

Simply put, workers up and down the income ladder are finding that their compensation simply doesn’t keep up with rising costs, especially of education, health care, and housing. 

Because of this, more Americans are turning to side gigs to help them make ends meet.

As the chart below from the 2019 MBO Partners State of Independence study shows, the number of "occasional independent" workers has increased by roughly 50% over the past 4 years.

Occasional independents are are workers who report working independently occasionally or sporadically, but at least once a month on average. 

Most occasionals have other jobs, but many have activities such as care giving, homemaking, school, etc that keep them from having a traditional full or part-time job. 

And, of course, most occasional independents are working side gigs to supplement their income. Other reasons for side gigs are to pursue a passion, build skills and to start or test out a new business opportunity.

Another reason side gigs are growing is that online platforms and marketplaces are making them easier to do. These platforms provide a low friction (meaning it's easy and quick to get started), highly flexible (work when you want or can) work options.

With wage stagnation, the hollowing out of middle skill jobs and the rising costs of housing, healthcare and education showing no signs of abating, we believe the number of Americans with side gigs will continue to grow.

40% of Americans Say They Struggle to Pay Bills

The Washington Post's ‘This doesn’t look like the best economy ever’: 40% of Americans say they still struggle to pay bills covers the fact that despite a strong job market and a 10 year long economic recovery, a lot of Americans still struggle financially.

The reason, according to the article, is this expansion has been weaker and its benefits distributed far more unevenly than in previous growth cycles, Key article quote:

This is a “two-tier recovery,” said Matthew Mish, head of credit strategy at the investment bank UBS. About 60 percent of Americans have benefited financially, he said, while 40 percent have not.

The 40 percent — which Mish calls the “lower tier” — have seen paltry or volatile wage growth, rising expenses for housing, health care and education, and increased levels of personal debt. 

The struggles of the lower tier is nicely illustrated by Intuit's recent Pursuit of Prosperity study. 

As the study chart below shows, almost half of Americans live paycheck to paycheck and have little to no savings.

Regular readers know we consider the growth of the lower tier is a key reason why more Americans are turning to highly flexible, low friction gig work to supplement their income.

This is especially true when someone is hit with a financial shock such as a job loss, health issue or unexpected major expense. 

As the Post article points out, "Half of U.S. jobs pay less than $18.58 an hour and more than a third pay less than $15, which makes it difficult to save or invest for a better future."

And without savings, people are vulnerable to financial shocks such as a job loss, healthcare issue or unexpected major expense.

In response to financial shocks like these, a growing number of people turn to gig work to generate extra income. 

We cover this topic in more detail in our Economic Uncertainty section. 

The Washington Post also has an excellent podcast interview with the article's author. 

The Great Risk Shift - and Economic Insecurity - Continues

"Risk shift" is the trend towards economic and other risks - and the responsibility for risk management - being shifted from institutions to individuals. 

Examples include corporations shifting more responsibility for retirement, career planning and healthcare to their employees and governments reducing social safety net programs.

Political scientist Jacob Hacker explored this trend in-depth in his 2006 book The Great Risk Shift.

We consider this one of the 3 books that best explain how the economy and jobs have changed over the past couple of decades.

Hacker recently released an updated 2nd edition of The Great Risk Shift with new data and insights. 

It's on our "must read" list.

He also recently wrote the NY Times Op Ed The Economy Is Strong. So Why Do So Many Americans Still Feel at Risk? 

His answer to this question is economic insecurity. Key quote from the article:

"... many Americans feel insecure. They may be doing well at the moment, but they fear that, however high they are on the economic ladder, a single bad step or bad event could cause them to slip. A booming economy hasn’t quieted these concerns, because insecurity remains a huge and growing problem in ways that voters and candidates instinctively get but the sunny job numbers largely hide."

Reinforcing this, the Federal Reserve just released their 2019 Survey of Household Economics and Decsionmaking study. 

It shows that 39 percent of Americans said they wouldn’t be able to scrape together the cash to meet a $400 emergency expense, 6 in 10 said losing their job would mean they couldn’t cover three months of expenses, and only a bit over 1 in 3 (36%) said their retirement savings were on track. 

So despite strong overall economic numbers, a large share of Americans are dealing with economic insecurity and uncertainty.

We see the impacts of the risk shift all the time in our research. It's a key reason for the growth of the gig economy because increased financial insecurity has resulted in more people needing to supplement their income.

We consider the risk shift one of the most important trends we follow. 

See our economic uncertainty section for more on this topic. And read Hacker's book. 

U.S. Birth Rates Continue to Fall

The Axios article The American Baby Bust covers the latest fertility data from the U.S. Centers for Disease Control. Key quote:

"The U.S. fertility rate has reached a record low, and the total number of births in 2018 was the lowest it has been in more than 30 years ..."

As the article chart below shows (click to enlarge), in 2018 there were 59 births per 1,000 women ages 15-34. 

This translates to a fertility rate - the number of babies a woman of childbearing age is expected to have over her lifetime, of 1.72, which is a record low. It's also well below the replacement rate, which is 2.1.

The fall in fertility is being caused by a variety of reasons, many of them good reasons.

These are nicely covered in Time Magazine's It May Not Be a Bad Thing Fewer U.S. Babies Were Born in 2018 Than in Any Year Since 1986.

It points out births by teens are at an all-time low, mistimed/accidental pregnancies have also declined and women are choosing to have fewer babies because of greater career choices and increased levels of education.

But as we pointed out in 2014, kids get a lot of bad press due to the cost of raising them and the potential problems they can have or cause. This leads to fewer adults wanting them.

Also, the decline in birth rates is another example of the impact of economic uncertainty. Simply put, if you're uncertain about the future you're much less likely to have kids. 

Immigration has offset the declining U.S. birthrates and helped keep the U.S. relatively young.

So we're in much better shape demographically speaking than most developed countries and especially countries like Japan, Spain and Russia which are experiencing population declines.  

But obviously the U.S. is hardly welcoming immigrants these days, so we may not be able to count on them filling the gap going forward.

Declining fertility rates have enormous social and economic implications. We'll have more on this in the future. 

Intuit's Pursuit of Prosperity Study

Intuit recently released The Pursuit of Prosperity, a study designed to to better understand how Americans:

• define prosperity
• view the factors that impact their ability to live the life they want
• feel about your current financial standing
• plan to achieve greater prosperity
• view their financial future

The bad news from the study is 78% of Americans feel prosperity is currently out of reach. But the good news is 58% are hopeful that they can achieve prosperity in the future.

The study chart below shows some of the key challenges facing many Americans. These results are consistent with other studies on this topic.

These numbers make it clear that many Americans are just getting by or struggling financially despite the health of the overall U.S. economy. 

We cover this topic in more detail in our Economic Uncertainty section.

Disclosure: Intuit is an Emergent Research client but we didn't work on this study.

Is America "The World's First Poor Rich Country"?

Umair Haque's essay Why America is the World's First Rich Poor Country suggests that America has created a new kind of poverty. 

He argues that despite relatively high incomes, growing numbers of Americans can't afford a middle class lifestyle. Key quote:

So Americans aren’t just absolutely or relatively poor, but poor in a new way entirely. First, the basics of life exploded in price, to the point that they are now unaffordable for many, maybe most, households. Second, Americans bear the risks of paying those unaffordable costs to an extreme degree, bearing the risks that institutions should, and so those risks are now ruinously high.

He sums up his analysis by saying the U.S. economy is now a place where "extreme capitalism meets Social Darwinism by way of rugged self-reliance crossed with puritanical cruelty."

About the same time Haque's essay came out, The Atlantic's cover story was The 9.9% is the New American Aristocracy. The 9.9% refers to those who are wealthy enough to be in the top 9.9% of Americans in terms of net worth. 

To be in this group took a net worth of $1.2 million or more in 2016. The 2016 median for this group was $2.4 million and the top members have net worth's in the $10 million range. Above that and you graduate into the top 1%.

As the article chart below shows (click to enlarge), the 9.9% control a bit under 60% of our nation's wealth.

The article is not positive about this group (which the author says he's part of). Key quote:

The meritocratic class has mastered the old trick of consolidating wealth and passing privilege along at the expense of other people’s children. We are not innocent bystanders to the growing concentration of wealth in our time. We are the principal accomplices in a process that is slowly strangling the economy, destabilizing American politics, and eroding democracy. 

This is also the theme of the 2017 book The Dream Hoarders. 

This book defines the new aristocracy as the top 20% of earners (more than $120,000 per year for a family). It too argues this group is advantaging their children at the expense of those who earn less. 

The book got a lot of play in policy circles. The DC think tank Brookings even developed a game you can play to see if you're a dream hoarder. 

Haque's essay and The Atlantic's story both focus on the effects of growing income inequality and it's impact on society. Both also stress how various forms of economic uncertainty and instability are impacting individuals, families and society overall. 

We still consider a 2014 article called The Lean Years one of the best we've seen at capturing how economic uncertainty impacts both individual decision making and the overall economy. 

Effects include the rise of the gig economy, major shifts in the retail industry, impacts on elections and many more.

Economic Uncertainty is one of the most powerful and important trends we follow. See our Economic Uncertainty section for more detail. 

More Americans Facing a Rent Burden

Nearly 43 million U.S. households rented their homes in 2016, which is about 9.3 million more than in 2004. 

And according to the Pew Research study American Families Face a Growing Rent Burden, 38% of these households are "rent burdened".

Pew defines rent burdened as any renter household that spends more than 30% of their income on rent. Being rent burdened means having less money for other expenses or savings.

The main cause of this is rents have been rising much faster than household income.

Between 2001 and 2015 median U.S. rents rose from $512 a month to $678, a 32 percent increase. Add in increases in utilities and other related costs and the increase is close to 50%.

Over the same time frame, household incomes were basically flat. The Pew chart below nicely illustrates these figures (click to enlarge).

In 2015 7 million of renter households were severely burdened, which is defined as spending more than half of their income on rent.

These households have little to no financial slack in their budgets, which means even minor financial shocks have a major impact.

But as the report chart below shows, even at moderate levels being rent burdened greatly reduces the ability to save and build wealth.

Being rent burdened certainly adds to economic uncertainty, which we consider one of the major social and economic trends impacting society.

We also see it as a driver of the growth of the gig economy, especially part-time gig work done to supplement income. 

Uber and Lyft Help Drivers Weather Financial Shocks

A recent academic study found that many ridesharing drivers do so to help them work through financial shocks and smooth income volatility.

Consumption Insurance and Multiple Jobs: Evidence from Rideshare Drivers is based on a database of the finances for over 1.5 million households.

From this database, the author was able to identify about 18,000 rideshare drivers. 

Using this type data has a very big advantage. Both spending and non-rideshare income data are available. This means the author had the ability to identify financial shocks and their role in the decision to become a ridshare driver.

The study is dense, has a lot of math and uses the typically obtuse language of academia. Few will want to wade through it.

But that's why we're here, to wade through stuff like this.

The key study findings are:

• Highly flexible, low friction employment - like driving for a rideshare firm - allows more people to work and earn money. 
• The income generated by this work helps workers weather financial shocks, such as unexpected bills, the loss of a job, or a reduction in work hours. It also helps them smooth income and increase financial stability by providing income when other sources aren't available or are reduced.
• The more credit constrained a person is (meaning they have relatively large credit debt or are unable to access credit), the more likely they are to turn to rideshare driving and the more important that income is.

Key quote from the study:

When faced with volatile incomes in main jobs and credit market imperfections, flexible jobs can be valuable. When credit constrained, using labor supply instead of assets to smooth transitory shocks is a “second-best” way to smooth because of the disutility of work. However, the availability of flexible labor supply can provide substantial benefits in the presence of credit market imperfections.

The study also points out that well intentioned government rules, laws and programs could easily reduce the value of this type of work. Again from the paper:

To the extent that these policies limit flexibility, they could end up hurting workers using flexible work as a consumption smoothing mechanism.

The findings of this study reinforce the findings from the 2017 On-Demand Workforce Study we conducted with Intuit. 

That study also found that most on-demand workers (those who get work assignments via an on-demand platform or marketplace) do so to supplement and/or smooth their income.

We also found many turn to on-demand work to help them work through a financial shock.

These findings are discussed in more detail in the Aspen Institute's article New Findings Reveal the On-Demand Economy Plays Key Role in Improving People’s Financial Stability.

These studies highlight several things often left out of the public debates about the gig economy.

First, highly flexible, low friction gig work has expanded work opportunities for many who are shut out of traditional labor markets.

And second, gig work provides many with the ability to smooth their income and weather financial shocks. 

These are beneficial both for those who need this type of work and for society overall.