The frictionless labor market

There are two labor markets: the W-2 one, and the 1099 one.

W-2s are the tax forms you get if you’re on someone’s payroll. 1099s list “miscellaneous income” — often payment for freelance gigs. These days, the latter market seems to be growing. As part of the analysis surrounding last Friday’s unemployment statistics, the Wall Street Journal reported that self-employment in unincorporated businesses is up by 381,000 people since March. As an illustration of why this is happening, the WSJ profiled 3G Studios, a Reno, NV video game company, which had 100 W-2 employees and 20 contract employees two years ago. These days? The company has 50 employees, and 80 outside contractors. CEO James Kosta told the WSJ that by hiring people for specific projects, he gets exactly what he needs for as long as he needs it. “Engineers were outliving their usefulness from one project to another,” Mr. Kosta told the WSJ. “When projects end, it’s better to re-evaluate your entire staff and almost just hire anew.”

Kosta is hinting at an idea that economists have bandied about for awhile, but which has always been hard to execute in real life: the frictionless labor market. Capital moves relatively freely. Money is completely fungible — one dollar is the exact same as the next — and so it can easily flow across borders and companies and industries, seeking the highest returns. Labor is different. One person is emphatically not the same as the next, and people often value stability more than units of currency would. There are language barriers and transaction costs. Money can pack up and move to North Dakota easier than an unemployed construction worker can get himself up there to work on new energy projects.

So there will never truly be a frictionless labor market. But since I received my last W-2 for work done in 2002, I realized recently that I’ve spent the past decade inhabiting something that fairly closely approximates it, as do the designers and artists Kosta works with.  While many people are wary of the frictionless labor market, I’ve quite liked it — certainly more than I would working at almost any company I can think of. Here’s what it looks like from the side of an individual worker:

1. Your career is a portfolio.  I always have multiple projects going on. The day I started writing this post, for instance, I did several interviews about blended learning (for a project I’m doing for the Philanthropy Roundtable). I also interviewed several people about tree management to minimize power outages for a column. Needless to say, utility engineers and people who work for philanthropies are quite different, but I got some intriguing ideas from all of them. Upside: I never get bored. I am always learning something new. Downside: high churn. While I’ve had some clients for the whole 10 years, they’re in the minority.

2. You experience income variability. This aspect, too, has an upside and a downside. The good news is, sometimes I’ve doubled my earnings year over year. The bad news is I’ve also experienced income cuts of 50%, though when that’s happened it’s generally been my fault. I’ve walked away from work I was no longer interested in or I undertook speculative projects that didn’t pay off. I’d also point out that people working for one company can experience incredible income instability, going from a paycheck to unemployment benefits, but most people don’t think that way. If you have 6 projects, and one goes under, you’re actually more stable than if you have one project that goes under. And if you work more, you can often make more, a connection that’s less clear in the W-2 market.

3. You’re plenty loyal, only to people, not institutions. I have built up quite a network of “colleagues” over the years. I work with an editor at one publication; she goes to another and I go along, sometimes staying with the first if I’ve met someone else I like there. Writer friends of mine take “real” jobs and hire me. Since these relationships are based, purely, on wanting to work together again, I think they’re stronger than relationships within large corporate departments where you didn’t necessarily choose each other. I imagine that Kosta’s company is discovering the same thing. Though you may “hire anew” after every project, I bet many teams reform again and again — precisely because people like the frictionless aspect of working with someone you already know and like.



5 Responses to The frictionless labor market


  1. Like you, I’ve only received a few W-2s in my life, though I have always had some sort of job, albeit part-time. I like the freedom this brings, and since my husband is a steady W-2 sort of guy, the fluctuations in my income have never been a problem. We generally have budgeted off of his income and treated mine as extra, which means that when it’s up, it’s all good, and when it’s down, we’re still fine.

  2. Twin Mom says:

    I think this sort of situation is very bad for workers, in most cases. Most people don’t manage money well and don’t save for the proverbial rainy day. I think it also undermines family life, because you can’t rely on a given income level for a house, apartment or medical insurance payment.

    In cyclical fields where depth of knowledge is required, worker demand and supply will be severely out of balance. One of my relatives worked as an environmental consultant for mining companies in the ’90′s and did very well, but when environmental laws reduced mining in the US, his niche went away.

    I wish I didn’t have to work this way- I miss the security of insurance and a paycheck.

    • Laura says:

      @Twin Mom- I think paychecks are kind of an illusion of security though. In some fields you might never lose your job, but in many it’s quite possible. If you always have multiple projects, though, or ones waiting in the wings, you’re more diversified. As for relying on a given level of income, the all-1099 families I know budget based on lean months. Then when more comes in, it’s gravy. I think this is a good way to budget in general. You spend less on big recurring payments so you have more to save or to do the kind of fun stuff that makes people happy.

      • Twin Mom says:

        If you lose your job and find another one, you regain some security. In most fields, they hire contractors so they can pay them less.

        For 1099 families in the top 10-20% of the income distribution, budgeting for the lean months makes sense.

        For the rest, budgeting based on lean months may mean chronic stress about expenses like paying medical bills for children, especially expensive asthma medications. I want to live in areas with few illegal drug users or people who involve the police in their domestic disputes. I count that as “where I want to be in life” not “fun stuff that makes me happy”. I guess being able to provide a secure environment for my kids lets me avoid unhappiness.

        It is frustrating that physically secure housing is so expensive in many parts of the country.

        • Cloud says:

          FWIW, all the contractors we hire make more per hour than they would as a full time employee, because we are not paying benefits. Whether or not that is actually a good deal depends on whether they have another source of health insurance, etc., and whether that hourly wage is high enough to carry them through lean months. And also, of course, how they feel about having to constantly keep an eye out for their next project. Although, as Laura points out, that is something most regular employees need to be doing these days, anyway.