The Freelance Economy: Is This the Future of Work?

New research shows the job deficit isn’t just a result of the down economy. Thanks to technology and a globalized market, businesses have changed the way they hire.

For more than a year we’ve all been waiting for the job creation engine to fire up, as it usually does following a recession. But small businesses — the group that generally fuels the engine, the one everyone expects to be the savior of an economy on the brink of a double-dip recession — aren’t hiring.

Theories abound as to why that is, but a recent report from the Kauffman Foundation suggests the job deficit is actually not recession-related. In fact, Kauffman’s study, “Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation,” shows that new employer businesses have declined 27 percent since 2006. However, when newly self-employed workers are added to the mix, the level of startups hasn’t declined, but instead has “held steady or even edged up since the recession.”

To put this in perspective, in the 1990s, new businesses opened their doors with about eight employees; today, that’s down to five. The culprit? The traditional business model doesn’t apply anymore, due to a number of factors, including technology and a globalized market.

Essentially we’ve created a contingent, freelance economy. There’s still money to be made, innovations to be marketed and ideas to be harvested. The difference is that many businesses today are choosing to hire on an as-needed basis, relying on a freelance workforce. But rather than being traditional freelancers, many of these people have become freelance entrepreneurs, crafting businesses out of projects.

The birth of a ‘Free Agent Nation’ The freelance economy is hardly a new phenomenon, of course. Over a decade ago, Daniel Pink noticed the trend, dubbed it “Free Agent Nation” and wrote a best-selling book of the same name. Before talking to Pink, I reread the book and was struck by his foresight. At the time he wrote it, though, free agency was about choices and possibilities. Today, it seems more about necessity and survival.

Pink says “the causes [of free agency] identified in the book haven’t disappeared,” but rather have “intensified.” Pink believes there’s been some improvement in the infrastructure for the free agent. He cites a “big change” in our abilities to collaborate, saying, “It’s become much easier for people in far-flung locales to work together on projects.”

Indeed, the companies that have created a marketplace, platform and infrastructure to support the new army of freelance entrepreneurs are among the biggest beneficiaries of this new economy.

Infrastructure is what companies like oDesk, Elance and MBO Partners offer today’s freelance entrepreneurs. Gary Swart, oDesk’s CEO, believes “traditional employment will never return to pre-recession levels,” and that although many U.S. employers need help, they can’t afford to hire on-site employees. Fabio Rosati, president and CEO of Elance, says providing a physical workspace for employees costs a company about $10,000 annually for each staffer. Do the math and you’ll see why businesses turn to the Internet to “augment” their local talent pool.

Both Swart and Rosati consider their companies a “back office” for freelancers, one that enables them to find jobs, collect payments and get health insurance. Gene Zaino founded MBO Partners 25 years ago with a similar goal of providing infrastructure (like billing, health and business insurance, and 401[k] plans) to high-performing independent consultants.

Rosati believes the music business, which showed consumers it was better to go online to get music than go to a store, helped create this new mentality. He adds, “We’ve been spoiled by the Amazon experience. [Seeking talent online is] a better buying experience. Employers want to buy what they need, when they need it. [Hiring today] is an on-demand relationship.”

He also says the rise of e-work is due in part to the digitization of work, the availability of cloud-based apps and the accessibility of cheap tools.

The future of freelancing Is this indeed the future of work? It seems likely. Swart predicts more people will choose freelancing as a career path, helping businesses create a balanced and blended workforce. (Blended workforces use both full-time and contingent workers.) Zaino agrees: “The genie has left the bottle. The millennials saw their parents get fired and have a different mindset about work. We live in a ‘project economy.’” Rosati makes it unanimous, adding that [unemployed] baby boomers are also driving this “megatrend.”

Recent surveys from both Elance and MBO Partners show freelance entrepreneurs to be a happy lot: 80 percent are optimistic about their new career path (Elance) and 60 percent are “highly satisfied” (MBO Partners).

Dan Pink also thinks this wave is here to stay. It’s a result, he says, of “changes within corporate America. The conditions — from workplace policies to the nature of the social compact itself — have become much more free-agent-like. Today, talented people need organizations less than organizations need talented people.”

So are we doomed to little or no job growth? It would help if the U.S. Department of Labor counted each new freelance entrepreneur as representing a newly created job, but it doesn’t.

It’s partly cyclical, says Pink. “All businesses are loath to hire because they're worried about demand and are as uncertain about the future as I've ever seen. Once demand picks up, I expect there to be more hiring. That said, many startups are able to have a big reach with fewer people, so perhaps hiring won't be nearly as robust as it was in the old days. The result of that: more startups and more free agents.”