In his paper “The Free Market Welfare State”, economist Sam Hammond argues that a strong safety net can complement a dynamic market economy. Part of his justification is that fewer people will lobby against creative destruction if the costs of adjusting (e.g. a period of unemployment) are mitigated. He notes that Denmark’s generous wage replacements and active labor-market policy enables them to have one of the highest job switching rates in the world. For context, Danes change jobs at about twice the rate as Brits.
But the value of the safety net to economic dynamism isn’t limited to reducing political resistance to trade and innovation. When there’s a safety set, people feel more comfortable to take risks. He cites a study which looked at the expansion of SNAP (the US’s food stamps programme) in the mid-2000s.
“Newly eligible households were also 20 percent more likely to start their own business, independent of whether they opted to receive the benefit – exactly what one would expect if food stamps acted as insurance for entrepreneurial risk-taking.”
A new working paper (HT: James Pethokoukis) argues that gig economy platforms may serve a similar function. It finds that when gig platforms like Uber and Lyft enter a market in the US, there is a 4-6% increase in new business registrations in the area.
The authors argue that the ability to supplement fluctuating and uncertain earnings through gig work spurs on entrepreneurship by insuring against some of the risks of starting a business.
It’s not clear if the US data will apply equally to the UK. There are two potential reasons why it might not. First, the UK’s safety net is more comprehensive than the US's.
Second, drivers may be more likely to drive full-time. In the US, around half of Uber drivers work for 15 hours or fewer each week, though not in highly regulated markets such as New York. This isn’t the case in London where the vast majority (72%) drive for 20 hours or more each week. Stricter licensing, vehicle requirements, alongside the congestion charge may make part-time driving less economical.
However, the trend seems to apply beyond ridesharing. The most recent Global Entrepreneurship Monitor’s annual report (which the Entrepreneurs Network helped launch in the UK), found that gig workers in the UK were twice as likely to be planning to start a business in the next three years compared to the general population (19.2% vs 8.5% respectively).
Some people argue that the rise of the gig economy is leading to a rise in ‘fake entrepreneurship’. But this paper highlights how gig work can serve as a stepping stone to more impactful forms of entrepreneurship.