Gies Business research suggests “gigs” help individuals bring in capital, hone skills

It’s not new, but it is a phenomenon that picked up steam in the early 2010s and has carried into the mid-2020s – Americans choosing to enter the gig economy, a free-market system in which individuals are hired for short-term “gigs.” Examples include drivers for a ride-sharing company, short-term rentals, freelancers, and other one-off jobs. More recently, researchers were curious to see whether those involved in the gig economy were using their participation to become entrepreneurs.

Spyros Lagaras, an assistant professor of finance in Gies College of Business at the University of Illinois Urbana-Champaign, joined researchers Matthew Denes from Carnegie Mellon University and Margarita Tsoutsoura from Washington University in St. Louis to take a closer look at whether the gig economy was, in fact, a common pathway to entrepreneurship. Their findings, which confirmed their suspicion, were published in the National Bureau of Economic Research’s (NBER) Working Paper Series and are scheduled to be published in the Journal of Financial Economics.

“I have a strong interest in how finance correlates with labor markets and how technological advances or innovation in the labor market affect entrepreneurship in general,” Lagaras said on his interest in this subject. “Because the gig economy was a huge innovation in the labor market, we set out to understand if somehow participation in the gig economy could act as a pathway to entrepreneurship. Beyond that, we tried to see who benefits and what the characteristics of the people are who respond to this specific innovation.”

More than 10 million individuals received income from the gig economy from 2012-2021, with the gig income accounting for $120 billion in one year during that period.

According to this paper, the researchers speculated that “the gig economy might mirror the experiences of an entrepreneur, allowing individuals to learn about entrepreneurship and accumulate industry-specific experience.”

A summary of their findings includes:

• Individuals who participated in the gig economy were significantly more likely to start new firms.
• First-time entrepreneurs make up 75 percent of those starting new firms.
• They tend to be relatively younger and have dependents, a demographic that is seeking more flexibility.
• They typically start firms in a similar industry to those in which they were participating in the gig economy.
• While gig-founded firms were less likely to survive, those that did grew at a higher rate and had better performance than those entrepreneurs who had not participated in the gig economy, suggesting that the gig economy allows individuals to experiment with entrepreneurship.
• Those who participated in the gig economy were more than twice as likely to start a business as those who hadn’t.
• Of those entrepreneurs who transitioned from the gig economy, there is an 8-16 percent higher likelihood of those businesses employing at least five people.

“The number one barrier in entrepreneurship is always access to capital,” Lagaras said. “You can see the gig economy as a way to secure the capital and the tools you need to start the company.”

Lagaras made a few observations that are likely to explain the trend, although he is careful to point out that these aren’t specifically outlined in the paper. First, he says that the gig economy allows people to experiment and learn a new relevant skill. Secondly, he notes that even if those individuals’ firms fail, there is always the fallback of going back to the gig activities, making becoming an entrepreneurial venture much less risky. Next, he says younger people are more likely to make this move because they tend to be early adopters, and even if they don’t succeed, they have more of their career remaining. Finally, he notes that younger people with families appreciate flexibility in their work schedule.

“The gig economy is a substantial part of the economy in the US now and has considerably grown in the last 15 or 20 years,” Lagaras said. “While we are careful not to assign a cause-and-effect relationship with what we discovered, we can say there is a positive relationship between the gig economy and entrepreneurial entry.”

Confidential data from the IRS was at the heart of the research project. The researchers wanted to see if individuals involved in the gig economy were creating sole proprietorships with a separate business identification number. They had to weed out those who filed business returns for the sole purpose of reporting gig income. If the gig income reported was the same as the income of the sole proprietorship, they were not considered as creating a business and were dropped from the study.

“We focused only on sole proprietorships for this paper for two reasons,” Lagaras said. “First, unlike a corporation, sole proprietorship involves one owner, so we know the owner spends time and money as the actual entrepreneur. We also expect gig workers to be more likely to form a sole proprietorship when starting a new firm relative to other firm types like corporations.”

Lagaras said policymakers have shown interest in these findings.

 “Some policymakers express the idea that using the gig economy as a stepping stone for entrepreneurship can be an engine of growth, used as a place-based policy to support entrepreneurship or as a less risky way to experiment with entrepreneurship,” Lagaras said.