Fair sharing of the gains

Digital platforms are becoming key players in the future economy. The increasing use of platforms as a business model will likely lead to major changes in the way work is organized. On platforms, conventional categories such as "employee", "employer" or "job" become blurred – as do the rights and obligations that have so far been associated with those categories.

It’s an important  characteristic of platforms that they don’t manufacture the products and services that they deliver to the user. Instead, the Platform will assemble solutions that precisely match the customer’s needs by coordinating the contributions of many different, external participants.

Amazon, Uber, Alibaba and Upwork are examples of large, global platforms and their business models give an indication of how the organization of value creation will change in a platform based economy.

As a business model, platforms perfectly fit with the technological developments in recent years towards an Internet of Things and Big Data. As virtually all devices are connected online and start to collect and exchange data, a large part of the new value and growth that companies create, will come from coordinating the interaction between these countless "smart" devices, based on detailed information about the user and the user's situation.

The large platforms have very few assets of their own. They typically do not own a large production facility and they have very few employees. Instead, they mobilize external resources as needed. This is much more flexible; you can quickly customize solutions, and you can easily scale the size of the operations up or down as demand changes.

However, this also means that the conventional roles of employers and employees, which have characterized the labor market since industrialization, lose relevance. Much of platforms’ strength and flexibility stem from their ability to draw on a vast network of loosely affiliated suppliers - and with that as the business model, a platform should explicitly avoid having a large staff of full-time employees.

From permanent employees to independent contractors

"Digital platforms" is a broad concept:

- Uber provides taxi service by connecting drivers with passengers.
- Upwork connects freelance graphic layouter, accountants and programmers worldwide with customers that have digital tasks they need to have solved.
- Apple's and Android's app stores provide access to software written by external app developers.

In all cases, tasks are not solved within the company. Instead the platform harnesses external resources for the specific occasion. Most of the work is done by loosely affiliated partners.

Seen from the platform’s point of view, it can tap into the services of a network of independent contractors, and it can choose the best suited and cheapest contractor from task to task.
Seen from the workers’ perspective, tasks that were previously performed by permanent employees, are outsourced as small, individual tasks, which freelancers and contractors must bid for one at a time.

Social security is not a part of the platform model

In the industrial age logic, permanent employees, in addition to their salary, have a number of rights, such as vacation, maternity leave, pension, unemployment benefits, training, insurance, etc.

In contrast, in the platform-logic, workers are independent contractors, and thus personally responsible for their security.

This change - from employees to independent contractor, from employer to platform, and from permanent employment to bidding for gigs - fundamentally challenges the current norms in the labor market. It is a shift, which could leave many workers much worse off in terms of pay and entitlements.

"Independent contractors" are also in a very different position when it comes to the unemployment benefits from the government, because the levels of support and the rights to subsidies usually depend on whether the person is seeking a conventional, full-time job.

It is a common dilemma for unemployed that they risk losing their benefits if they take several temporary and part-time assignments because they then change status to being a small contractor. The way the system is designed, you can not be a bit of each - but in practice this is increasingly how many work.

Why do large firms exist?

In principle, platforms are not a new model. Companies have always used freelancers and temporary employees. Nor is it new to outsource a large part of a company’s tasks to subcontractors. In recent decades, more and more companies have moved their production overseas to countries with lower wages.

What is new, though, is the extent to which digital technology and web-based platforms have made it much easier and cheaper to find external resources for the occasion.

Back in 1937, the American economist and Nobel Laureate Ronald Coase, described why companies build their own production facilities and have their own permanent employees: Although the company may not be able to utilize its employees' labor all the time, it would be too cumbersome and costly to find and hire freelancers and external suppliers for each new task.

With the new digital platforms, the costs of finding and coordinating resources have dropped dramatically, and the selection of potential suppliers has become much greater.
Previously, a company that wanted something made in China, would go through local agents. Today, they can use a platform such as Alibaba or Li & Fung to quickly get an overview and solicit quotes from thousands of potential suppliers throughout China. Similarly, even small tasks, such as the layout of a report, some programming or a market survey, can easily be offered on global job exchanges like Upwork.

According to Ronald Coase's logic, the falling coordination costs mean that businesses are better off having fewer permanent employees. Rather than building internal assets, the company should rely on coordinating external resources. In other words, the company increasingly becomes a platform.

A global marketplace without distances

The balance of power between employer and employee is markedly different in an economy based on digital platforms. Platforms are very transparent and this creates fierce competition among those offering their services.

The platform is a marketplace where one can easily get an overview of possible suppliers. You can easily see the prices that each demands and see the ratings and reviews that previous customers have given them.

Basically, an increasing share of all tasks can be performed anywhere. If you are based in a rich and expensive country as a designer, programmer, translator or doing some other purely digitally based job, the emergence of global platforms will put you in direct competition with colleagues in Ukraine, India, Pakistan, where wages, even for the best skilled, are much lower.

Ratings leads to winner-take-all

Ratings, for instance by giving between 0 and 5 stars, is a feature on all digital platforms. If you do your jobs well, you can build a profile of good ratings that can attract more job offers and enable you to demand a higher salary.

However, the system can also lead to a so-called winner-take-all effect in which those that have the very highest ratings get almost all the jobs and sales, while everyone else is ignored. When customers can choose freely on a global platform, they will naturally prefer the suppliers that have the best ratings. 

In this situation it is not easy to be mediocre. In a traditional workplace, an employee who was not performing at the job, would first get a warning and then eventually be fired. But as a contractor for a platform you can not be fired because you're not employed. At the taxi platform Uber, for instance, drivers are automatically ”de-activated” if their average rating falls below 4.6. There’s no boss to fire you – the algorithm behind the platform simply stops sending you requests.[I]

Professionals compete against amateurs on price

Another factor, which changes the game, is the blurring of the traditional distinction between amateurs and professionals on platforms.

This is particularly evident in what is called the "sharing economy": From one moment to the next a private person driving around can switch roles to become a self-employed driver for Uber. Someone with an extra room can operate what amounts to a hotel. A student or someone interested in design can bid on layout and graphic tasks at a very low pay, just to get some practice ...

If you need to have a simple task done, and it merely needs to be good enough, you can find people on the platforms that are willing to do it for you at a very low pay, often out of interest. But if that sort of tasks is what you are trying to make a living doing, hobbyists and amateurs obviously become a very tough kind of competition.

Overall, there are good reasons to consider whether the changes in conditions in the labor market mean that many people will have to get by in a much more precarious situation. A perfect storm seems to be brewing on the labor market. 


[I] http://therideshareguy.com/10-things-that-can-get-you-deactivated-as-an-uber-driv