A one way ticket to gig?

We propose a search and matching model to explore the labor market implications of a growing gig economy. The economy has conventional and gig sectors, with workers searching in both. Some workers never consider gig employment, and others do under certain conditions. Workers are allowed to work in both sectors at the same time if they prefer. Workers match with gig positions with probability one, but gig workers face a wage penalty and matching frictions in the conventional sector. As a result, gig work serves as an alternative to unemployment, the gig sector absorbs labor market slack from the conventional sector, but the choice to engage in the gig economy comes at a cost to workers. By comparing the implications of the model under various levels of exposure to the gig economy, we explore the nature of the sector and the opportunities and consequences that come with it. The benchmark model provides insights into the rise of the gig economy, highlighting its impact on workers and the segmentation of the labor markets. While the presence of the gig sector opens up new job opportunities, potential welfare implications from the existence of the gig sector and its frictions are estimated to range from a benefit around 80% to a cost of around 20%, and directly impact up to two-thirds of the workforce relative to a standard search model with no gig sector. The costs mostly apply to workers with middle to lower productivity, and therefore have important distributional implications. Promoting a more inclusive gig economy can enable market systems to address labor market challenges while preserving their innovative and adaptive capabilities. As a case study, the gig economy highlights the balance between market efficiency and social equity, providing valuable perspectives on labor relations, creative destruction, and policy solutions grounded in market economics.