Ideas for Leaders #354

Navigating the Global Online Contract Labour Market

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Key Concept

Online labour markets match employers, mostly from richer economies, with skilled contractors in large part from developing economies for the performance of a variety of projects large and small. With a growing pool of experienced contractors and platform design features that alert employers about potential hidden quality problems, this market is soaring. The economic impact is generally positive, with wages often higher than the average in the contractors’ country of origin, while still providing cost savings to employers, and a larger pool of potential contractors increasing the likelihood of good matches.  

Idea Summary

When looking for contract employees for a project, employers now have direct access to workers from across the world thanks to digital labour contract platforms such as Elance, Freelancer, Guru and oDesk. On these platforms, employers post their jobs or actively look for contractors, while contractors post their profiles, which include résumés as well as recommendations and ratings from past projects, and actively troll for jobs. Between 2009 and 2013, the number of employers billing on oDesk, the largest online marketplace for contract labour, increased by over 800%, and the number of working contractors per quarter increased by about 1000%. During the same four-year period, the quarterly wage bill on oDesk increased by approximately 900%, from $10,000,000 to almost $100,000,000.

A National Bureau of Economic Research paper highlights the key implications of this explosive growth, looking specifically at the following areas:

Geographic distribution of work. More and more employers are from higher-income countries, and more and more contractors are from lower-income countries. The dichotomy is more pronounced for employers — there are still a high number of contractors based in high-income countries. In addition, certain regions of the world are becoming specialists in certain functions. For example, contractors from China, Poland, and Russia specialize in software development, information systems, and web development.

Distribution of income. Online labour markets could create some income inequality as superstar contractors with a long record of jobs and a long list of recommendations — the main criteria employers have for assessing prospective contractors — could hoard the best jobs. However, the breadth and depth of the contractor pool is also enabling the ‘long tail’ effect: employers with very specific needs are finding the few contractors who have the niche capabilities they are seeking.

Boundaries of the firm. Asked about the last time they hired an online contractor, just 15% of oDesk users surveyed said they considered hiring an employee instead. Nearly 60% said the alternative would be to do the job themselves. For most employers, if the work was not outsourced, it would be added to the workload of existing employees. The size of the firm would stay the same.

Market design. The online labour markets are designed to match employers with the right contractors and vice-versa. Design features include not only the opportunity to download CVs, but also performance ratings and feedback that cannot be deleted (which ensure objective assessments of both contractors and employers), and standardized tests that help confirm the skills and knowledge of contractors. Market design continues to evolve and expand the amount of available information. Virtual office applications now allow ongoing monitoring of contractors, for example.

Business Application

The full economic implications of the digitization of the contract labour market has yet to be explored, and will need to include data from the offline markets for comparison purposes. Although the information above sets the stage for further academic research, the implications for businesses, especially SMEs, are clear.

Online labour markets have significantly expanded the pool of contractors while also significantly reducing the search and coordination costs for hiring and working with these contractors. Often, but not always, wages will be lower than in the employer’s location. The lower costs and higher returns are attracting users: 76% of oDesk employers surveyed said that a primary reason for using the site was that “remote is less expensive.” But there are other important reasons: 46% of surveyed employers selected “can get work done faster remotely,” 31% selected “difficult to find local talent,” and 21% selected “no room/equipment.”

Hidden quality problems can be a concern when hiring someone remotely, because many characteristics of the prospective workers cannot be observed. Design features from performance ratings and recommendations to standardized tests help, but there is still room for improvement (through more detailed performance ratings, for example).

Nevertheless, the growth in the number of employers and amount of billed hours is a testament to the matching and production efficiency of these online labour markets. Employers looking for specialists such as web designers, web programmers, software developers, SEO experts, data entry specialists, mobile app developers, virtual personal assistants, and freelance writers will find the skilled and experienced workers they need.

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Authors

Institutions

Source

Idea conceived

  • October 2013

Idea posted

  • April 2014

DOI number

10.13007/354

Subject

Real Time Analytics