Transaction Cost Economics, Labor Law, and the Gig Economy

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The rapid growth of technology not only is creating innovative goods and services, but it is also altering the workplace and the traditional understanding of relationships between employee and employer. This can be seen today with the rise of the gig economy and alternative work arrangements. Our paper seeks to explain how technology has reduced the transaction costs of contracting in the market. In particular, we identify the innovations that have led to reductions in triangulation, transfer, trust, and measurement costs. These costs are relevant for creating greater exchanges between consumers and labor suppliers and, hence, more work for contractors and freelancers. Innovations that reduce measurement costs also reduce the firm’s costs of outsourcing contract work relative to employing. We conclude with a discussion of the radical implications for labor law.

You will never get to perfection because transaction costs are always positive, but they can be reduced. (Epstein 2015a, p. 791)