Does the gig economy promote entrepreneurship?

Michael Rapoport | Oct 05, 2020

The gig economy has exploded over the past decade, with companies such as Uber, DoorDash, and Airbnb matching consumers with contract workers willing to provide them with transportation, home rentals, and other services. It’s given consumers more options and convenience, and upended the taxi, restaurant, and hotel industries, among others.

But the gig economy may have another effect as well: gig-work opportunities may help people make the leap to entrepreneurship and start their own businesses, according to research from Washington University’s John M. Barrios, Rice University’s Yael V. Hochberg, and Rice PhD candidate Hanyi Yi.

To study the effect of the gig economy on entrepreneurship, the researchers looked at the entry of ride-hailing services such as Uber and Lyft into nearly 1,200 US cities and towns through 2016. Because the services entered different cities at different times, the researchers were able to get a before-and-after view of entrepreneurship in each market relative to the advent of the gig economy locally. 

In those areas, the researchers find, new business registrations and Small Business Administration loans to newly incorporated businesses each rose about 5 percent after ride hailing became available. Interest in entrepreneurship, as measured by Google searches for phrases such as “how to start a business” or “how to incorporate,” rose about 7 percent.

Furthermore, the researchers write, where interest in gig work was highest, so too was the impact on entrepreneurship. To measure the take-up of gig employment in a given city, Barrios, Hochberg, and Yi used a proxy measure based on the number of Google searches for terms relevant to such jobs, including Uber and Lyft. They find that greater search activity for these terms correlated with stronger entrepreneurial effects.

Gig work may encourage the formation of new businesses by giving potential entrepreneurs a way to supplement their income during the lean times that many new ventures experience, the researchers explain. And if these entrepreneurs start a business and it fails, gig work gives them something to fall back on.

The impact of ride hailing’s entry was strongest in cities with lower income levels and lower educational achievement, according to the researchers. New-business registrations got an especially big boost from the entry of ride hailing in areas where wage growth was volatile, further underscoring that it offers insurance and a backup source of income for would-be entrepreneurs. 

The effects were also largest in areas where borrowers had either especially good or particularly bad credit. In areas with lots of creditworthy borrowers, economic activity was greater, and so demand for entrepreneurs’ goods and services was greater. In areas where borrowers were poor credit risks, the gig economy was itself a source of capital to would-be entrepreneurs, making them more creditworthy or less dependent on credit.

Ride hailing doesn’t necessarily change everything about entrepreneurship, however. It doesn’t really change what kinds of new businesses are created, the researchers find, nor does it affect which parts of a city or town new businesses tend to open in—so ride hailing’s effect on new businesses isn’t simply a matter of making some neighborhoods easier to get to.