The Gig Economy and Entrepreneurship

The rise of platform-based work has transformed labor markets. Nearly 10 million Americans have participated in the gig economy over the past decade. This transformation may have important effects on entrepreneurship by allowing individuals to gain industry experience, encouraging experimentation, and lowering downside risks faced by founders.

In Entrepreneurship and the Gig Economy: Evidence from US Tax Returns (NBER Working Paper 33347), researchers Matthew R. Denes, Spyridon Lagaras, and Margarita Tsoutsoura use administrative tax data to examine how gig work affects entrepreneurial activity. They leverage data from the Internal Revenue Service (IRS) covering the universe of US tax returns from 2012 to 2021. This allows them to track individuals receiving gig income linked with newly created firms.

Gig economy participation substantially increases entrepreneurial entry, with gig workers learning on the job and experimenting by starting firms that appear to be riskier.

The researchers find that individuals who previously participated in the gig economy are about 1 percentage point more likely to start new businesses compared to non-gig workers, representing a doubling of the underlying rate of entrepreneurship. Interestingly, about three-quarters of this effect comes from first-time entrepreneurs. Turning to the characteristics of potential entrepreneurs, they find that lower-income individuals, younger workers, and those who likely benefit from flexibility (such as single parents) are significantly more likely to form new businesses after gig work experience.

A novel feature of tax returns data is that it allows the authors to track firms started by founders previously working in the gig economy compared to the rest of the firms in the economy. They show that gig workers who become founders often start businesses in sectors mirroring their gig experience. For example, transportation gig workers tend to create transportation-related firms, while those in selling platforms frequently start trade-oriented businesses. This pattern suggests that gig work provides valuable on-the-job learning for would-be entrepreneurs.

Next, the researchers examine firm survival and performance. Firms founded by individuals with gig experience are significantly larger at inception than firms founded by those without it, both in terms of revenue (23 percent higher) and employee count (39 percent higher). Yet firms founded by gig entrepreneurs are about 3 percentage points less likely to survive in the one to three years following their creation. Those that do survive report higher profitability than comparable non-gig-founded businesses. These results suggest that firms started by gig workers display greater experimentation and increased risk-taking.

Additional findings highlight that the employment practices of gig-founded firms reflect their founders' experiences. These businesses are between 9 and 18 percent more likely to employ independent contractors, and they tend to hire more contractors as well. Further, participation in the gig economy could increase liquidity and access to external credit. Consistent with this channel, the researchers find that gig founders are also more than 10 percent more likely to access debt financing, suggesting improved capital access.

Are gig founders better off? The results point to gig founders experiencing higher income growth after starting their businesses relative to other entrepreneurs. Their income is 3.2 percent higher one year after founding and rises to 13.1 percent higher after three years. As the gig economy continues to expand, these combined findings detail how the gig economy offers a pathway to entrepreneurship.

The researchers gratefully acknowledge funding support from the Annie E. Casey Foundation, the Block Center for Technology and Society, the Ewing Marion Kauffman Foundation, and the W.E. Upjohn Institute for Employment Research. This research is conducted through the Joint Statistical Research Program of the Statistics of Income Division of the IRS. The views and opinions presented in this paper reflect those of the authors and do not necessarily reflect the views or the official position of the Internal Revenue Service. All results have been reviewed to ensure that no confidential information is disclosed.