The gig economy is not a business model innovation. It is a consequence of falling transaction costs.

In Transaction Cost Economics, Labor Law, and the Gig Economy, published in the Journal of Legal Studies, Liya Palagashvili and I use the transaction cost framework to explain why technology is systematically replacing employment relationships with direct contracting – and why labor law has not caught up.

Four costs that technology reduces

Every exchange between a buyer and seller of labor involves four categories of transaction costs: triangulation (finding each other), transfer (executing the exchange), trust (ensuring quality and reliability), and measurement (verifying what was delivered).

Employment exists because, historically, these costs were high. It was cheaper for a firm to hire a permanent employee than to find, vet, contract with, and monitor an independent worker for every task. The employment relationship bundles all four cost reductions into a single, ongoing arrangement.

Technology has disrupted this calculus. Ride-sharing apps reduce triangulation costs to near zero. Payment platforms reduce transfer costs. Rating systems reduce trust costs. GPS tracking and digital delivery reduce measurement costs. When all four costs fall simultaneously, the economic rationale for employment weakens.

Technology has reduced the costs of contracting in labor markets, particularly through reductions in triangulation, transfer, trust, and measurement costs. These declining costs create greater direct exchanges between consumers and labor suppliers.

The implications for labor law

American labor law assumes that the employment relationship is the norm and independent contracting is the exception. The legal framework – minimum wage, overtime, unemployment insurance, collective bargaining – is built around the employer-employee dyad.

But if technology is making direct contracting systematically cheaper than employing, then the employment relationship is shrinking not because firms are evading labor law but because the economic conditions that made employment efficient are disappearing. The gig economy is not a loophole. It is a structural shift.

Palagashvili and I argue that labor law must adapt to this reality rather than trying to force new economic arrangements into old legal categories. The question is not how to make gig workers into employees but how to provide protections and benefits in a world where the employment relationship is no longer the default.

Read the full article: Transaction Cost Economics, Labor Law, and the Gig Economy, 50 Journal of Legal Studies S219 (2021).