Cry freedom and enjoy the “gig economy”

Cry freedom and enjoy the “gig economy”

by Eben Wilson
article from Tuesday 14, February, 2017

THE UPSIDE DOWN political economy of socialism never ceases to amaze.

Hordes cry for “good jobs” in tandem with politicians claiming to create jobs and growth; then along come Uber, Deliveroo and Pimlico Plumbers and the same politicians do everything they can to destroy those new jobs and the economic growth they create in the name of “worker’s rights”.

The “gig economy” is criticised for offering only insecurity and the risk of exploitation. By definition, the first is true; this is piece work in services, and it’s chosen as a lifestyle by tens of thousands who accept the insecurity, but mostly call it flexibility and freedom.  The second is possible, but unlikely in the medium term; Uber drivers and Deliveroo bike riders will wheel away; plumbers are always scarce.

Whether they have somewhere to wheel to depends on competing players needing their services; and whether that competition exists depends on low barriers to entry into new ways of doing things.  Uber, Deliveroo and Pimlico Plumbers (pictured) are prime examples of disruptive growth businesses that have actually invented these low barriers; Uber through its smart-phone app, Deliveroo through its connected network of cycling couriers, and Pimlico through being in essence a marketing and booking agency for plumbing skills.  

What these methods do is allow each business to grow at low cost to their cash flow.  The need for liquidity in a business is one of the least understood elements of economic growth and there is one instrument that is like a killer virus to cash retention; payroll taxes.

The gig economy is a direct technical response to this threat. Businesses are following Adam Smith’s maxim about the division of labour to minimise the burden of tax on their need for free cash.  The net cost of a deliverable service is reduced by allowing other labour to specialise in the actual service delivery.  Re-impose that burden and that growth will disappear and the first outcome will be higher unemployment; the second outcome will be a serious loss of liberty to those who prefer to work flexibly and free of state or corporate constraints.

A paradox is that government knows this. In the 1960’s they tried to control employment patterns through a Selective Employment Tax. This discriminatory tax aimed to boost manufacturing exports through a payback scheme with bonuses. At the same time it punished services.  It failed spectacularly, and looking back from today’s world of widespread services that were inconceivable in the 1960’s, with automated manufacturing producing vastly more while using less labour, it looks utterly crazy.  It was also invidious because it spawned a gradual and substantial increase in payroll taxes to the point where our standard marginal rate of payroll tax (counting employer’s NIC, employee’s NIC and income tax) is now 45% for each earned pound. That creates vast unemployment among the less productive by making them expensive to employ.

The great danger in the attack on the gig economy is that the state will adopt similar prejudicial blanket invasions on workers’ freedoms; with higher endemic unemployment.  In Scotland, we have seen opposition to these new industries, mostly by those working in their old versions, and protected by regulation. The Scottish Government with its subsidies for a client electorate finds it very difficult to turn against these forces of conservatism. Once again, the meretricious notion of “partnering” with other power groups leaves us with a government unable to protect its taxpaying citizens from special interests who destroy growth-enhancing liberalism.

In reality, there is a perfectly plausible policy approach that could be engineered to protect workers in the gig economy.  It is true that individual, often young, and sometimes less articulate workers may tend to be cavalier about their own social security.  They need to know that there is price to liberty.  The Pimlico Plumber Gary Smith apparently brought his case after having a heart attack which meant he felt he could no longer work full time. Is it harsh to suggest that if he had believed he was considered to be self-employed (he claimed he was not) he should have been expected to have income replacement insurance as part of his social responsibilities?

If the state wants to protect both those who face insecure working yet want to be in work, it should create a tax system that allows this.  To do this we need to reapply the principle of personal contributions to our social security so that we can provide the opportunity for truly diverse support. That does not mean that those in the gig economy face more tax, but that their tax payments are put into their own personal welfare accounts as paid-up reserves.

A rule that every pound earned, from the first pound, incurs a percentage social insurance contribution put into a personal social security fund would enfranchise the less well-off more than any amount of free social support delivered by the central state.  Everyone would also know that they were socially equal in their personal responsibility for their social needs.

If this was accompanied by a reduction in the present high NIC contributions by employers and employees we would have a lot more business being done. We would also have invented a genuine market in diverse worker productivity with a lot of competition for labour that freely chooses where to offer work, incentivising business to improve terms.  Staff workers, contracted workers and freelance workers would compete on the basis of their suitability for the businesses that need them, incentivising them to improve their skills.

What this is really institutionalising is the recognition that “workers’ rights” are contractual rather than inalienable; so not only does any contract have to be an agreement that works for both parties but, crucially, that the nature of these agreements must be allowed to vary widely because different trades operate with different risks.

What the state needs to do is get out of the way and allow individuals to choose how they cope with that risk.

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