Labor Market Changes, Technology, and Gig Work
Your cousin just got laid off from a car factory. A friend of yours earns more driving for a delivery app than at her old cashier job, but she says her paycheck "feels smaller" than it looks. Are those the same kind of story? By the end of this page you will be able to explain what is going on in each one, and put numbers on it.
Why people are unemployed
The unemployment rate is the share of the labor force that has no job but is actively looking for one.
$$\text{unemployment rate} = \frac{\text{unemployed}}{\text{labor force}} \times 100\%$$The labor force counts people who have a job plus people who are looking for one. A student who is not looking for work is not in the labor force.
Economists sort unemployment into three types, because each one has a different cause and a different fix.
| Type | Cause | Example |
|---|---|---|
| Frictional | Normal time spent searching or switching jobs | A new graduate looking for a first job |
| Structural | Workers' skills no longer match the jobs available (technology, industry change) | A bookstore clerk whose store closes because people shop online |
| Cyclical | The whole economy slows down in a recession | A car factory lays off workers because nobody is buying cars |
Classify each situation as cyclical, structural (caused by technology or industry change), or frictional unemployment: (a) a car factory lays off workers during a…
Classify each situation as cyclical, structural (caused by technology or industry change), or frictional unemployment:
(a) a car factory lays off workers during a recession;
(b) a bookstore clerk loses her job because customers shop online;
(c) a recent graduate is searching for a first job.
In a labor force of 5,000,000 people, the unemployment rate rises from 4% to 8% during a recession. (a) How many more people are unemployed? (b) Explain why a recession…
In a labor force of 5,000,000 people, the unemployment rate rises from 4% to 8% during a recession.
(a) How many more people are unemployed?
(b) Explain why a recession often hits young workers and workers with less education harder than others.
(c) Describe one way a worker's income could fall even without losing a job.
Technology and the labor market
New technology, such as robots, self-checkout, and online shopping, does two things at once:
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It eliminates some jobs (cashiers, assembly-line workers).
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It creates new ones (robot technicians, warehouse software managers, delivery drivers).
The new jobs usually require more training and often pay more. So workers do not all feel the change the same way. Those who can learn the new skills tend to gain. Those who cannot may see lower pay or a long job search.
The same idea applies in a downturn. During a recession, young workers and workers with less education are often hit hardest. They have less experience and fewer savings, and they are often the first to be let go or the last to be hired. Income can also fall without a layoff: an employer may cut your hours, freeze raises, or cancel overtime and bonuses.
A warehouse installs robots. The robots eliminate 200 jobs that paid $\$17$ per hour. The company creates 60 new technician jobs that pay $\$25$ per hour. All jobs are…
A warehouse installs robots. The robots eliminate 200 jobs that paid $\$17$ per hour. The company creates 60 new technician jobs that pay $\$25$ per hour. All jobs are 40 hours a week.
(a) Calculate the net change in the number of jobs.
(b) Calculate the weekly pay for a former warehouse worker and for a technician.
(c) Explain which workers benefit from the change, which are harmed, and why.
A store is replacing most cashiers with self-checkout kiosks. A cashier named Camila earns $\$15…
A store is replacing most cashiers with self-checkout kiosks. A cashier named Camila earns $\$15$ per hour, working 2,000 hours a year. She is considering a retraining program for a logistics technician job.
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The program costs
$\$5{,}400$in tuition. -
It takes 6 months, during which she will lose
$\$8{,}000$in wages. -
Afterward she expects
$\$21$per hour for 2,000 hours a year.
(a) Calculate her current yearly pay and her expected yearly pay after retraining.
(b) Calculate the total cost of retraining, and how long it takes to recover it.
(c) Analyze how technology and an economic downturn could affect Camila differently from a worker with a college degree.
Gig work and independent contractors
Gig work is short-term, task-based work, often found through an app: rideshare driving, food delivery, freelance design. Gig workers are usually independent contractors (also called freelancers or self-employed workers), not employees.
| Employee | Independent contractor | |
|---|---|---|
| Tax form | W-2 | 1099-NEC |
| Taxes withheld | Yes | No, you set money aside |
| FICA | Employee pays 7.65%, employer pays 7.65% | You pay self-employment tax of 15.3% |
| Benefits (health plan, 401(k) match, paid leave) | Often | Usually none |
| Schedule | Set by employer | Flexible |
| Expenses (gas, car wear) | Employer's | Yours |
Advantage: flexibility. Disadvantage: no benefits, uneven income, and you pay both halves of FICA.
So "what I earned" and "what I kept" can be very different. To compare gig work with a regular job, find net earnings per hour:
$$\text{net per hour} = \frac{\text{fares} - \text{company fee} - \text{expenses} - \text{self-employment tax}}{\text{hours worked}}$$Gig work means short-term, task-based jobs, often found through an app. Which of these are gig work? (a) driving for a rideshare app; (b) a full-time cashier with a set…
Gig work means short-term, task-based jobs, often found through an app. Which of these are gig work?
(a) driving for a rideshare app;
(b) a full-time cashier with a set schedule;
(c) a freelance graphic designer who takes projects from different clients;
(d) a delivery driver paid per order through an app.
Give one advantage and one disadvantage of gig work.
Liam delivers food through an app. Last week he earned $\$480…
Liam delivers food through an app. Last week he earned $\$480$ in total and worked 24 hours. Calculate his gross earnings per hour. Explain why this number is not the same as his take-home pay per hour.
Priya drives for a rideshare company. Last week she worked 30 hours. She collected $\$900$ in fares. The company kept 20% of the fares. She spent $\$130$ on gas and…
Priya drives for a rideshare company. Last week she worked 30 hours.
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She collected
$\$900$in fares. -
The company kept 20% of the fares.
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She spent
$\$130$on gas and$\$70$on car wear and maintenance. -
As an independent worker she must pay self-employment tax of 15.3% of her net earnings (assume this base).
(a) Calculate her net earnings after the company fee and expenses.
(b) Calculate the self-employment tax and her net per hour after it.
(c) Compare this with a job paying $\$15$ per hour where she pays 7.65% in FICA. Which pays more per hour, and what benefits might the job offer that gig work does not?
Running your own small business
Some people turn self-employment into a business, such as a food truck or a lawn-care company. The owner keeps the profit:
$$\text{profit} = \text{revenue} - \text{costs}$$Pros: you are your own boss and profit can be large. Cons: income is uncertain, you pay startup costs first, you have no employer benefits, and you carry the risk if sales drop.
To judge a business fairly, compare it with your best alternative, a regular job.
Mateo wants to open a food truck. Startup costs are $\$30{,}000$, which he has saved. In a typical month he expects $\$12{,}000$ in revenue and $\$7{,}500…
Mateo wants to open a food truck.
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Startup costs are
$\$30{,}000$, which he has saved. -
In a typical month he expects
$\$12{,}000$in revenue and$\$7{,}500$in costs for food, fuel, permits, and insurance. -
He expects to work about 217 hours a month.
-
His alternative is a job at
$\$16$per hour, 40 hours a week (use 4.33 weeks per month).
(a) Calculate his expected monthly profit and his profit per hour worked.
(b) How many months will it take to earn back the startup cost?
(c) Calculate his monthly profit if revenue falls 30% while costs stay the same.
(d) Argue whether you would advise him to open the truck, discussing risk and opportunity cost.
Back to the start: your cousin's layoff is probably cyclical, if it came from a recession that slowed down car sales, while your friend's delivery paycheck "feels smaller" because expenses and self-employment tax come out of her gross earnings.