The Effect of Gig Workers on Stock Prices

Gig workers, who are hired to complete a project, or “gig,” constitute a significant portion of the workforce.  The McKinsey Global Institute states that gig workers make up between 20 and 30 percent of all workers in the U.S. and the European Union, and U.S. News estimates that gig workers comprise 33 percent of U.S. workers.  Also, gig workers are not confined to the technology industry.  A 2016 report from the Bureau of Labor Statistics finds that gig workers exist throughout the corporate and civic sectors, including construction, retail, health services, and the arts.  Also, by 2028, many economists expect gig workers to make up the majority of the workforce.

Prior research argues that corporations hire gig workers for several reasons.  One reason is that permanent managers wish to keep as much of the profits as possible among themselves.[1]  This motive gives managers the incentive to minimize the number of permanent workers who may qualify for profit-sharing plans, and one way to do that is to maximize the number of gig workers.  Another reason that corporations hire gig workers is that, as the number of gig workers continues to increase, each gig worker’s bargaining power for another contract is reduced.  This phenomenon, combined with weak labor markets, means that gig workers cost less and less for corporations, making them a preferable alternative to more expensive permanent workers.[2]

A third reason that corporations hire gig workers is to avoid the potentially-steep regulatory costs associated with compensation compression.  Kochanski and Stiles (2013) argue that compensation compression exists when (1) new and experienced workers in the same role have close compensation levels or (2) workers in lower-level roles have a pay level close to that of workers or managers in higher-level roles.[3]  Although compensation compression is legal, it can cause problems if, for instance, it leads to a situation where lesser-paid but more-experienced employees are protected by law or agreement that insulates them from salary inversion.[4]  If the law or agreement is violated, the firm is likely to incur a regulatory penalty, a lawsuit from the protected workers, and lower revenue due to a tarnished reputation.

Since much of the growth in the number of gig workers has been, and will continue to be, due to hiring by corporations, a pertinent question arises:  What is the impact of gig workers on shareholder value?  In an ideal case, this question would be answered using detailed data on gig workers in corporations.  However, this cannot be done for two reasons.  First, the data are simply not available.  Second, even if the data were available, corporations do not announce when they hire gig workers.

To circumvent these issues, I use detailed data on professional wrestlers to measure the value of gig workers.  Like their corporate counterparts, pro wrestlers are sports gig workers and thus face most if not all of the labor dynamics that corporate gig workers face.  First, World Wrestling Entertainment (WWE) states that the wrestlers who perform in its events are independent contractors who are booked for matches, or wrestling gigs.  Corporate gig workers face the same situation.  Second, WWE wrestlers are not guaranteed follow-on matches after their contracts expire.  Corporate gig workers face this situation as well.  A third similarity is in obtaining health insurance, as most corporate gig workers and pro wrestlers are responsible for getting their own health insurance.  A fourth similarity is in compensation, as the typical corporate gig worker or pro wrestler experiences fluctuations in compensation based on the number of gigs worked.  Also, due to low bargaining power, neither worker can command a compensation level that is fully commensurate with his or her contributions.  Still, superstar performers exist among corporate gig workers and pro wrestlers, and they can command the highest compensation in each sector.  For instance, WWE superstar and box-office sensation John Cena can command higher compensation than a newly-hired, unestablished wrestler.  Also, for instance, a seasoned computer programmer with industry experience and strong knowledge in the latest programming languages can command higher compensation that a new college graduate with a degree in computer science.  Given these similarities, the market’s valuation of wrestlers will provide important information about how the market values corporate gig workers.

Although detailed data exist for professional wrestlers, WWE does not always announce the hiring of pro wrestlers, which means that the market’s reaction to the hiring announcement cannot be measured.  However, since news is released about the deaths of wrestlers, I measure the abnormal returns to WWE stock due to the sudden deaths of pro wrestlers, whether active or retired.  This approach to measuring the value of human resources, first used by researchers in 1985 to measure the market value of managers, is based on the idea that the sudden death of a person causes any abnormal change in equity value that may occur around the death if no value-altering event (e.g., earnings announcement) occurs around the sudden death.[5]  If negative abnormal returns accrue to a stock due to the sudden death, the market believes that the firm will lose value due to the absence of the deceased person, and the magnitude of the negative abnormal return is interpreted as that person’s value to the firm.  By contrast, if positive abnormal returns accrue to a stock due to the sudden death, the market believes that the firm will gain value due to the absence of the deceased person, and the negative of that abnormal return is interpreted as the value of the deceased person to the firm.

I hand-collect data on the population of wrestlers who, according to wrestlerdeaths.com, died suddenly from October 19, 1999, to July 29, 2018.  I begin with October 19, 1999, because that is the day on which WWE went public.  After eliminating wrestlers who died due to a progressive illness or whose death occurred in close proximity to a value-altering event, a final sample of 96 sudden-deaths emerges.

Overall, event-study analysis shows that abnormal returns of 0.35 percent accrue to WWE shareholders upon the sudden death of wrestlers, suggesting that the presence of gig workers reduces shareholder wealth.  Based on an average market value of equity of $400.4 million over the period of analysis, shareholder wealth increases by almost $1.5 million per sudden death.  Also, ordinary-least-squares regression analysis shows that the sudden deaths of active and older gig workers cause shareholder value to rise, meaning that their presence reduces shareholder value.  Given the strong similarities among corporate and sports gig workers, these results suggest that shareholders would react similarly to the sudden deaths of corporate gig workers, thereby implying that the presence of gig workers in corporations reduces shareholder value.

These results can be explained in three ways.  One, hiring gig workers is an agency problem.  As stated above, one theory as to why gig workers have proliferated is that permanent managers wish to hoard profits, and they can do that by hiring gig workers so as to reduce the number of permanent employees, who likely qualify for a firm’s profit-sharing program.  Although this practice would enable managers to keep a larger share of the firm’s profits, it would reduce shareholder value, thus making the hiring of gig workers an agency problem.  Two, active gig workers are reducing complementarities, or synergies, among workers, leading to lower value.  The reduction in complementarities among workers arises because gig workers have an incentive to hoard knowledge so as to increase their likelihood of receiving additional contracts from the firm.  Three, when a gig worker dies, shareholders place a positive value on the firm’s option to hire a permanent worker.  At the same time, even if the firm opts to hire another gig worker, it can find one who is more qualified or willing to work for less.

ENDNOTES

[1] Abraham, Katharine, and Susan Taylor. 1996. “Firms’ Use of Outside Contractors: Theory and Evidence.” Journal of Labor Economics, 14(3), 394-424.

[2] Katz, Lawrence, and Alan Krueger. 2017. “The Role of Unemployment in the Rise in Alternative Work Arrangements.” American Economic Review, 107(5), 388-392.

[3] Kochanski, Jim, and Yelena Stiles. “Put a Lid on Salary Compression before It Boils over.” July 19, 2013. https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/salary-compression-lid.aspx.

[4] Weil, David. 2014. The Fissured Workplace. Harvard University Press, Cambridge, MA.

[5] Johnson, Bruce, Robert Magee, Nandu Nagarajan, and Harry Newman. 1985. “An Analysis of the Stock Price Reaction to Sudden Executive Deaths: Implications for the Managerial Labor Market.” Journal of Accounting and Economics, 7(1-3), 151-174.

This post comes to us from Professor Kelly Carter at Morgan State University. It is based on his recent article, “The Effect of Gig Workers on Stock Prices,” available here.

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