TECH
07/13/2015 05:12 pm ET Updated Jan 03, 2017

How Digital Platforms Like LinkedIn, Uber And TaskRabbit Are Changing The On-Demand Economy

We've been inundated with stories about how advances in technology will change employment -- from the rise of the "on-demand economy" to the effect of artificial intelligence and automation on jobs. A June report from the McKinsey Global Institute, however, makes a strong case that one particular application of technology is not only having a healthy effect on jobs and productivity, but could also add $2.7 trillion to global gross domestic product in the next decade.  

The report, entitled "Connecting talent with opportunity," looks at so-called "online talent platforms" such as LinkedIn, Monster.com, Uber and TaskRabbit. These platforms, McKinsey argues, can combat the problem of stagnant wage growth by "connect[ing] individuals to the right work opportunities."

Put simply, these sites, services and apps match the labor supply with demand more efficiently than current mechanisms do. McKinsey's research suggests that the long-term effects of digital talent marketplaces could shorten the length of time that people are unemployed and provide more opportunities for freelance workers.

The report places online talent platforms into three categories:

  • Platforms that enable people to find jobs or employees, like LinkedIn, Monster.com, Vault, Indeed, Careerbuilder, Xing and Glassdoor;
  • Platforms that match services or workers to demand, like Uber, TaskRabbit, Angie's List, Upwork and Amazon Home Services; 
  • Platforms for talent discovery and management, like Good.co, Payscale and ReviewSnap.
Infographic: Connecting Talent With Opportunity In the Digital Age
McKinsey Global Institute
Infographic: Connecting Talent With Opportunity In the Digital Age

"These platforms make a big improvement," said James Manyika, a director of the McKinsey Global Institute and co-author of the report. "People can express preferences for work and employers can find the workers they need." 

Most digital labor platforms are for knowledge workers, according to the report, but large-scale labor market platforms for blue-collar workers are growing as well.

"Along with platforms for knowledge workers steadily growing, e.g. LinkedIn,"Manyika added, "there are other fast-growing on-demand platforms like Uber, TaskRabbit and others. These provide labor market matching in local services, like for a house cleaner or somebody who will do a specific task."

Manyika says digital labor platforms will increase global GDP by enhancing productivity and providing job seekers with added fluidity, or the ability to move easily between jobs. Fluidity, he noted, has been declining "for the last 25 years."

"When people change jobs through hiring, wages typically go up," Manyika said. "There is a strong correlation between labor market fluidity and increase in wages."

Global labor market fluidity
McKinsey Global Institute
Global labor market fluidity

The countries that could benefit the most from these marketplaces, the report found, are those with endemic unemployment and low workforce participation rates, like Greece, Spain and South Africa, as well as those where informal, or unregulated, employment is common.

"These platforms have the effect of reducing informality in employment," said Mankiya. "That's less of a factor for the U.S., which is at most 10%, but it's a big deal for Brazil and India."

Labor Markets around the world
McKinsey Global Institute
Labor Markets around the world

Reputation, Reputation, Reputation 

Historically, workers have used credentials, licenses and/or a brand-name degree to show their potential worth. Now, a much richer set of signals, from social media profiles to online reviews to portfolios, will be availabe to workers and employers.

LinkedIn is probably the most familiar talent platform for most people. Like Monster.com, profiles on early versions of the site were essentially online resumes. Today, a professional profile not only includes a history of employment and education, but also recommendations, endorsements and connections -- all of which provide social validation beyond what you claim about yourself.

On-demand platforms, however, provide marketplaces for people to perform tasks that are more limited in scope, as opposed to longer-term employment, for which the hiring process is longer.

To facilitate that transaction, on-demand startups have taken reputation scoring to a new level: People staying in spare rooms or accepting rides from strangers depend on the platforms and other customers to vet hosts and drivers for them. 

Manyika predicts the next generation of on-demand startups and industry players will rely on reputation-based matching for both workers and employers. As technology giants like Google and Amazon enter the market for home services, they'll have significant power to direct business toward providers with the best reputations. 

Word-of-mouth recommendations and references have been a part of the employment process for centuries, but coding them into digital platforms opens up what were previously more tacit signals to a much broader audience.   

"A reliable nanny or cleaner may not have a certificate, but they may have hundreds of positive reviews," said Manyika. "These things are creating all sorts of ways to show your work and show your reputation." 

When labor matching is taking place on a large scale, the thinking goes, employers are more likely to get the people they really want. This can be a positive, empowering trend for workers who have desirable skills and track records, as well as for employers with a well-earned reputation for healthy work environments and good benefits.

"It's unequivocally good news for small companies," said Manyika. "It makes it so much easier to discover talent, it is all goodness. For large companies, it's a mixed picture. It used to be hard for outsiders to cherry-pick as accurately as they might. When all workers are putting their info on LinkedIn, that changes."

The downside is that, for workers who don't have skills or reputations that are in demand, on-demand talent platforms can lay those shortcomings bare. 

"In a new world looking at credentials, skills and traits, people who don't have them are much more exposed," Manyika said. "Imagine a world where can you scan and what you want is undifferentiated labor. What's changed is that you now have a much larger pool to draw from. Whenever that happens, it depresses wages."

Another challenge for workers, Manyika noted, is that reputations are not easily portable between digital platforms. Someone who builds up a trusted reputation on one platform, for instance, can't transfer that over when getting established on another one.

"The nice thing about credentials is that they follow everywhere," Mankiya said. "A degree follows, but that's currently not the case with reputations. I would love, if I have a great rating on Uber or Yelp or TaskRabbit, for that to be portable. We saw this in the e-commerce world, with merchant ratings on eBay and Amazon not being portable." 

What Should Workers Demand In An On-Demand Economy? 

Society doesn't automatically benefit simply from inviting entrepreneurs in to set up a website or mobile app, nor do benefits trickle down to everyone when agents of disruption create on-demand apps to exploit loopholes in regulatory structures.

While the advantages may be clear for full-time jobs, they're less apparent for people working in the on-demand economy, often called the "gig economy," in which people aren't moving from one job to another but, rather, from one task or contract to another. Manyika described this as "the difference between someone who lives in a '1099 world' versus a 'W-2 world'." 

In the United States alone, 53 million Americans are now working as freelancers, according to “Freelancing in America: A National Survey of the New Workforce,” a study conducted by Edelman Berland and commissioned by the Freelancers Union in partnership with Elance-oDesk -- which is, as you might guess, a digital talent platform.  

While platforms like LinkedIn could help professionals move up a traditional career ladder, with associated benefits, sick or family leave and retirement plans, tens of millions of contractors for on-demand startups might experience more economic insecurity and inequality, not less.

Infographic: Snapshot of the freelance economy
McKinsey Global Institute
Infographic: Snapshot of the freelance economy

For instance, driving for Lyft or Uber can provide significant supplemental wages or be a temporary gig with a great deal of flexibility, but there are also outstanding questions about whether a driver's wages add up to sufficient income to support a family.

As startups create new platforms for labor markets that haven't already been digitized, several dynamics will be worth watching.

First, consider the collective bargaining power of contractors working with on-demand startups, as opposed to organized labor in traditional employment. 

"There may be a need to self-organize to advocate for things people care about," said Manyika. "It's not clear how traditional institutions apply. They will have to adapt to this new world."

Second, consider how or whether profits or equity are shared between the labor platforms and those providing the labor advertised or sold on them. 

Third, consider the extent to which costs (cleaning equipment, gas for cars) are externalized to contractors and liability is shifted from the platform to the contractors working on it.  

Finally, watch how all of these questions are explored as various suits move forward in the legal system. This summer, a California judge ruled that an Uber driver was an employee, not a contractor. 

Some researchers maintain that self-regulation by startups will be enough to protect consumers and weed out bad actors and poor service. Even if that equilibrium does emerge, government watchdogs will still need to play a role in auditing these systems for discrimination or gaming. 

More broadly, if on-demand platforms become enduring institutions in labor markets, then nations with significant numbers of contractors will need a different kind of social compact than what existed in the last century that fits a different kind of labor and work.

As James Surowiecki wrote in The New Yorker this summer, the "real problem here is that Uber drivers don’t quite fit into either of the traditional categories."

Declaring them independent contractors or employees, as a California judge presiding over a lawsuit against Lyft commented, means forcing a square peg into one of two round holes. We’d do better to create a third legal category of workers, who would be subject to certain regulations, and whose employers would be responsible for some costs (like, say, reimbursement of expenses and workers’ compensation) but not others (like Social Security and Medicare taxes). Other countries, including Germany, Canada, and France, have rewritten their laws to expand the number of worker categories. There’s no reason we can’t do the same, and give gig-economy workers a better balance of flexibility and security.

To do that, Surowiecki suggests that workers at on-demand startups should be extended benefits, like workers’ compensation and unemployment insurance, that aren't dependent on an employer -- not unlike the way that Affordable Care Act works for health and dental insurance.

There's a reason Uber loves Obamacare: "The democratization of those types of benefits allow people to have more flexible ways to make a living,” Uber CEO Travis Kalanick said last November. “They don’t have to be working for The Man.” 

To maximize the potential of digital labor platforms of all types, the McKinsey report similarly recommended improving social safety nets and access to education, which should also help those negatively affected by increasing automation. The report added that policymakers must ensure that people have access to the Internet, modernize labor laws, improve safety nets to provide benefits, and define clear rules of data ownership and privacy. 

What's left unsaid in all of this is what it will mean for society if our worth as workers, managers, clients and contractors is reduced to a long trail of digital traits, reputation points and consumer reviews. Some people may work to live, while others may live to work. As we negotiate today's shifting landscape for employment, finding the right balance between contracting and community building will be a challenge that everyone will share in.

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