“The (Virtual) Wild West”

The Disruptive Effects of Crowdsourcing:

How Global Freelancers are Impacting Traditional Employment and Pay Models in the United States

 

Disruptive Forces at Work

By definition, freelancing has been around since medieval times, when mercenary fighters would travel the countryside and offer their services in exchange for money. Today’s freelancers make their services available by way of technology, typically over the internet, rather than by roaming around looking for work. They do share something in common with their eighteenth century namesakes: a notable lack of sworn allegiance to a single employer. Many freelancers seek out their opportunities by choice, but increasingly the freelance economy is populated by displaced workers who are left with very few options during one of the worst recessions in the history of the United States.

Add to this equation the dual influences of technology and globalization, and the freelance economy appears more like the “Wild West” than an organized and predictable labor market. It not only creates unprecedented challenges for those workers who are trying to earn a living, but it also has a significantly disruptive effect on traditional forms of employment and compensation, particularly in the “knowledge work” and creative services jobs that were once the safe haven for what Richard Florida has referred to as the Creative Class.

As traditional forms of employment have disappeared in the United States economy, some new and not-so-new working arrangements have emerged, largely driven by economic need. Crowdsourcing has emerged as a method to connect freelancers with paid work opportunities. Crowdsourcing falls within the loose definition of outsourcing, which, according to IDC SharedXpertise, represents a $500 billion global industry (2009). Current revenue estimates for the leading crowdsourcing firms are a mere sliver of the pie, ringing in at approximately $838 million as of December 2010, based on a freelance market report (Miller, 2010). Major players in the industry such as oDesk and Elance reported 18.8 percent and 16.8 percent gains, respectively, in revenue in calendar year 2010. Also worth noting: the dramatic increases in the number of available freelancers and contractors offering their services through crowdsourcing sites. Elance alone reported an 88.3 percent increase to over 300,000 service providers (Morgan, 2011).

What is Crowdsourcing?

If outsourcing was the non-traditional employment trend of the latter part of the twentieth century, this century’s trend appears to be crowdsourcing. Crowdsourcing is the practice of taking complex projects and tasks and breaking them down into smaller pieces to allow multiple people to work on the component elements that will later be assembled for a completed project. It differs from outsourcing in that the work is broken down and components are assigned or awarded to individuals, as opposed to taking an entire business process and assigning it to another entity for turnkey management. Like freelancing, crowdsourcing in its simplest form is not new.

One early example of crowdsourcing: the compilation of recipes for some of the first Betty Crocker cookbooks in the 1930s, the vast majority of which were submitted for free in hopes of winning one of General Mills’ contests. While the activities that constitute crowdsourcing are decades old, the term “crowdsourcing” was coined in 2006 by Jeff Howe, a writer for WIRED magazine, as a way to define and make sense of the emerging trend, facilitated by technology and accelerated by increasing worldwide access to high-speed internet and the competitive pressures of globalization.

Howe defines crowdsourcing as the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call. This can take the form of peer-production (when the job is performed collaboratively), but is also often undertaken by sole individuals. The crucial prerequisite is the use of the open call format and the large network of potential laborers (2006).

In an Alabama Law Review analysis of crowdsourcing in the context of the Fair Labor Standards Act (FLSA) the author further defines crowdsourcing as a process “where complicated tasks are broken down and distributed to thousands of workers throughout cyberspace, then later consolidated into a finished product (Cherry, 2009, pg. 1079).

Today’s crowdsourcing encompasses a variety of activities, many of which are a natural complement to current social media practices and technology. The more social applications of crowdsourcing include photo sharing, movie reviews and other word of mouth recommendations. However, there are dozens of areas where crowdsourcing begins to encroach upon traditional roles and employment opportunities, such as advertising, programming, writing, research, design, product development, and data analysis. Technology makes it possible to source this work instantly without following traditional hiring processes, and globalization puts United States workers in competition with a global labor market. This opens the competition to workers from India, China, the Philippines and nearly 200 other countries, frequently at lower pay levels and with lower respective costs of living that create a price advantage difficult and in some cases illegal to match in the U.S. due to minimum wage requirements under the Fair Labor Standards Act (FLSA).

To drive the point home about offshoring work to lower cost labor sources, a speaker at a recent crowdsourcing conference referred to the computer as “the sewing machine of the future (Biewald, 2010)” in the context of creating the virtual assembly line of the future in low-cost regions in Africa and Asia.

Where Is the Impact Being Felt?

            Once limited to menial, low-skill tasks such as categorizing photographs for online search engines, de-duplicating comments and entries on websites, or transcribing word-for-word from source documents to make the text searchable, crowdsourcing has slowly crept into other higher value work, including design, research and even professions such as law and accounting. At CrowdConf 2010, Patrick McKenna, founder of crowdsourcing firm LiveOps and president of Kineks, generally described the three levels of labor as follows:

(1)   Transactional: tasks that can be delegated or assigned to an individual or entity with specific instructions and expectations for the completed work

(2)   Relational: projects and tasks that are interpersonal in nature, and frequently require interaction and collaboration among more than one team member to complete the work

(3)   Creative: requires intellectual and/or creative content from an individual, often based on ambiguous instructions or loose guidelines

McKenna emphasized the potential and scalability of the transactional work, offering a “formula” for profitability in crowdsourcing: find a pile of cash with transactional tasks;  understand how you add value to the transaction, by lowering costs, increasing quality, increasing the speed of answers; and build a process that leverages the crowd and an interface that enables the crowd to optimize the transaction (CrowdConf, 2010).

In an analysis that was published in the Alabama Law Review, the current and emerging practices of crowdsourcing are compared to the labor halls of the last century, with one clear distinction being the emphasis on computer skills and access to a high-speed internet connection in place of an emphasis on manual labor and access to one’s own work tools. Not surprisingly, the same analysis also refers to “virtual sweatshops” that allow corporations to hire the cheapest available labor in jurisdictions with the least amount of regulation (Cherry, 2009, pg. 1082).

Some early “victims” in the competition between certified and trained professionals and their upstart, often amateur global competitors include accountants, translators, designers and lawyers. To compete in the realm of crowdsourcing, many of the overseas (and increasingly, domestic) professionals are required to work “on spec,” essentially giving away their initial work speculatively with the hopes of winning a paid project. As new and cheaper options become available online, many companies opt for the lower cost providers, driving the overall market rates down and leaving highly-qualified professionals with only a few options: lower their own prices, eroding their profit margins; hold the line on pricing and inevitably lose business; or get out of the business entirely.

In the textbook Compensation, thirteen occupations are listed for their susceptibility to offshoring, by definition moving the jobs to locations beyond a country’s borders. Of the occupations listed, at least ten of them are currently listed on the dominant crowdsourcing sites: computer programmers, telephone operators, billing clerks, computer operators, data entry keyers, word processors and typists, tax preparers, medical transcriptionists, telemarketers and proofreaders (Milkovich, Newman & Gerhart, 2011, pg. 115).

To highlight the dramatic impact of crowdsourcing, see the table in the Appendix, labeled Table 1, that shows the US Department of Labor’s Bureau of Labor Statistics (BLS) wage data for three of the listed positions, and the current target price per hour for comparable work using the crowdsourcing sites.

It is worth noting that only one of these occupations, computer programming, is being bid at a per hour rate close to the United States minimum wage of $7.25 per hour. And there are a number of U.S. based freelancers bidding for projects on oDesk, Elance and Mechanical Turk (MTurk) at per hour rates well below minimum wage, ranging from $2.22 per hour on MTurk to $5.55 on oDesk, simply to remain competitive in what appears to be a race to the bottom as certain parts of the workforce face commoditization. Even one of the leading voices for the crowdsourcing industry certifies this on the Crowdsourcing.org blog, acknowledging that the effective hourly rate on Mechanical Turk tasks works out to $2.00 per hour (Ipeirotis, 2011).

Matt Barrie, chief executive of Freelancer.com, one of the top five crowdsourcing sites, compares online outsourcing (or crowdsourcing) to eBay, except that it involves the buying and selling of services rather than items or goods. Barrie points out that the average wage of many of the newest users of the internet is less than $5.00 per day, and estimates that more than half of the 6.8 billion people in the world are still not online, “so there is a huge amount of labor coming into the market (Howarth, 2010).”

A similar surge is observable from the buyer side, based on 2010 data contained in The Freelance Marketplace Review. Of those crowdsourcing suppliers and websites reporting data in the previous year, Freelancer.com reported over 300,000 active buyers in a single quarter, followed by Elance with over 120,000 buyers and vWorker with more than 35,000 buyers in one quarter (Morgan, 2011). Most sites elected not to report their buyer statistics, so this data point is somewhat incomplete.

On the other side of the equation, there are increasing concerns about exploitation of cheap labor, particularly in parts of the world where the crowdsourcing wages are significantly lower than the prevailing wage of the region. One such area is the United States, where a random search on oDesk yields well over 5000 contractors for hire, commanding hourly rates sometimes as high as $100.00 per hour (56 out of 5320, or approximately 1 percent), but more frequently under $10.00 per hour (2141 out of 5320 or 40 percent) and even some below $5.00 per hour (1056 out of 5320, or nearly 20 percent). On the home page of the oDesk website, the service promises “hourly rates to fit any budget,” and clearly they are able to make good on that commitment (oDesk, 2011).

In an attempt to bring leadership to this issue of potential exploitation, author David Alan Grier has offered up a “Crowd Workers Bill of Rights” that would set standards for how crowdsourced workers are treated, paid, and involved in the projects they are hired to support. Grier describes four classes of crowd workers, starting with the divided labor worker (sometimes referred to as microlabor) who works on smaller tasks that become part of a larger project; partial employment workers (interchangeable with temporary workers) with more sophisticated skills; contest workers, competing “on spec” in the hopes of being paid, but frequently working without payment; and public opinion workers, such as bloggers and others who volunteer their time to curate and participate in the development of online content.

At a minimum, according to Grier, each class of worker deserves to be paid for their work (unless they are knowingly volunteering their time), they should be aware of how their work is being used to support a larger project or goal, and they must understand, in the event their work is not selected, why they were excluded and if an aspect of their work was deemed insufficient (Grier, 2011).


What is the Outlook?

            The top five crowdsourcing sites, based on data obtained from The Freelance Marketplace Review, are in order of revenue projections oDesk, Elance, Freelancer, PeoplePerHour and vWorker. In 2011, these five companies are expected to gross over $535 million, with oDesk expected to close out the year earning $75 million per quarter (Morgan, 2011).

During the economic downturn, companies laid off workers by the hundreds of thousands, and many of those workers remain unemployed and looking. Some have given up and, as so-called “discouraged workers,” they no longer show up in the U.S. Department of Labor official unemployment statistics. Others are continuing to send out dozens of resumes each week in the hopes of getting back into a stable job. There are some who are wading into the fray as solopreneurs or independent contractors, and depending upon the uniqueness of their skill set, many displaced workers will find their footing in the freelance economy. However, those who are relying on a craft, trade or profession that can be easily duplicated overseas will face tough competition and lower billing rates due in part to the emergence of crowdsourcing and the low cost of labor outside of the United States.

On a global scale, a similar set of circumstances has emerged in the labor market that precipitated the Fair Labor Standards Act (FLSA) and original minimum wage mandates in post-Great Depression America, in 1938. To avoid a situation where workers would underbid each other out of desperation to get work in a time where official unemployment numbers exceeded 25 percent, FLSA was enacted to set a minimum acceptable wage. In the ensuing 70-plus years, there have been numerous arguments about the economic sensibility of such laws, but for the most part this has been a basic threshold for earnings in the United States.

With crowdsourcing threatening the lowest earning level and pitting American workers against competitors in countries with much lower costs of living, there has been talk within the U.S. Department of Labor and the Internal Revenue Service (IRS) about how to reign in an industry that has gone unregulated since its inception, and how to enforce labor and tax laws in cyberspace. In one case, the IRS made a determination that players in a virtual world called Second Life who were serving as greeters for a fictitious Electric Sheep Company were in fact employees subject to payroll taxes (Mistral, 2008).

In 2009, the Alabama Law Review published an extensive evaluation of this topic, tracing FLSA back to its original intent and putting the Act to the test in the current context of “virtual work.” The author uses this catch-all term to describe not only crowdsourcing, but also online gaming, telecommuting, and “work” in virtual worlds that exist online, such as Second Life (Cherry, 2009).

While conducting research for the Law Review, the author learned of a number of other potential occupations that exist virtually on Second Life, including travel agents, party planners, designers, casino operators and game developers, among several others (Cherry, 2009, pg. 1087). Many of these “jobs” are paid in the Second Life online currency, Linden bucks ($L), which actually have an exchange rate with the U.S. dollar ($US); $4.79 (US) buys 1,000 Linden bucks as of April 26, 2011. Linden bucks are typically used to purchase virtual real estate, to upgrade clothing work on the player’s avatar, or to participate in a variety of games and social settings that are available in Second Life.

Conclusions

            Crowdsourcing is here to stay. Companies have learned how to take advantage of technology and global sourcing practices for every element of their respective supply chains, including access to talent and labor in the physical and virtual dimensions. What remains to be seen is whether common sense will prevail to tip the scales in favor of competitive pay rather than exploitation, but if the fates of the textile industry, furniture making and heavy manufacturing are any indication, the rush to capitalize on rock-bottom prices in the commodity labor market will only pick up speed until there are consequences for the businesses involved.

As economic recovery plays out differently in different parts of the world, the U.S. finds itself as a laggard rather than a leader of the recovery, leading to a much slower pace of job creation domestically. People who were laid off at the beginning of the recession in 2008 and still have not found work are likely to have reached the end of their unemployment benefits as well, forcing them to evaluate their options and perhaps settle for unqualified, low wage work to have any income at all. Meanwhile, in this dual-speed global recovery, emerging markets are encouraging more workers to learn computer skills and get into the global marketplace to compete for work, and many of these workers are able to work for wages that range from $3.00 to $5.00 per hour and live comfortably.

In the so-called New Normal, freelance work may be the only option for many American workers, at least in the near term. A certain amount of government intervention appears to be inevitable, as what is currently taking place in the unregulated virtual labor market comes dangerously close to violating tax and labor laws. Companies that are sourcing work online are usually not paying taxes in the countries where the work is being done, which could cause other countries to work with the U.S. government to reign in some of the more egregious practices.

For those workers who have valuable creative and technical skills, it should be possible for them to earn a comfortable living and continue to remain competitive in spite of the global crowdsourcing competition. However, there are a number of professions that are being blindsided by this emerging market and its price pressures, among them lawyers, accountants, marketing and design specialists, translators, and many others. Some have taken the “if you can’t beat ‘em, join’em approach” and started sub-contracting their own work to crowdsourced freelancers in low cost countries, while others have scaled back their businesses to a minimal level of sustainability, hoping for things to improve.

Hope is not a strategy. What is needed to get the labor market back on course is a mix of policy that encourages the use of home-grown talent; improvements in education to preserve the competitive edge of American workers; and a grassroots effort within the workforce to reignite the innovative spirit and competitive, can-do attitude that led the world for over a century. In the meantime, we can look forward to more of the same as lower-cost labor emerges in the market as quickly as new jobs are being created, often bypassing qualified but expensive U.S. workers in favor of cheaper labor overseas.      


Appendix

Table 1

Wage Data for Three Positions, and Price Per Hour Using the Crowdsourcing Sites.

Occupation BLS Wage Data Per Hour (Est.) Crowd-sourcing Site Per Hour (Est.) Variance Variance (Annualized)
Computer Programmer Median $85,430 $41.00/hour $7.22 per hour (India, via oDesk) ($33.78/hour) (approx. $70,000)
Tax Preparer Median $61,480 $29.55/hour $5.55 per hour (Philippines, via Elance) ($24.00/hour) (approx.. $50,000)
Telephone Operator Median $31,670 $15.22/hour $3.03 per hour (China, via oDesk) ($12.19/hour) (approx.. $25,000)

References

Biewald, L. (2010). “Crowdsourcing Opening Session Remarks.” CrowdConf 2010 [Conference]. San Francisco, CA. 4 Oct. 2010.

Bureau of Labor Statistics. (2010). Occupational Outlook Handbook, 2010-11 Ed. Retrieved online http://www.bls.gov/oco/

Cherry, M. (2009). Working for (virtually) minimum wage: Applying the Fair Labor Standards Act in cyberspace. Alabama Law Review.

Grier, D. (2011). 4 categories of crowd workers and their rights [Podcast]. The Daily Crowdsource. Retrieved online http://dailycrowdsource.com/2011/04/26/crowd-leaders/crowd-leader-david-alan-grier-4-categories-of-crowd-workers-and-their-rights/

Howe, J. (2006). Crowdsourcing: A definition. Retrieved online http://crowdsourcing.typepad.com/cs/2006/06/crowdsourcing_a.html

Howarth, B. (2010, Aug. 17). Crowd sourcing gets the job done. Sydney Morning Herald. Retrieved online http://www.smh.com.au/technology/enterprise/crowd-sourcing-gets-the-job-done-20100817-127nt.html

IDC SharedXpertise. (2009). IDC research: Dramatic rise in outsourcing competition and reduced contract value. Retrieved online http://www.sharedxpertise.com/content/4224/idc-research-dramatic-rise-outsourcing-competition-and-reduced-contract-value

Ipeirotis, P. (2011). Mechanical Turk, low wages, and the market for lemons. Crowdsourcing.org. Retrieved online http://www.crowdsourcing.org/editorial/mechanical-turk-low-wages-and-the-market-for-lemons/3681

McKenna, P. (2010). “Make it work: Big ideas and great successes.” CrowdConf 2010 [Conference]. San Francisco, CA 4 Oct. 2010.

Milkovich, G., Newman, J. & Gerhart, B. (2011). Compensation, 10th Ed. New York, NY: McGraw-Hill/Irwin.

Mistral, P. (2008, May 12). IRS says virtual greeters are real employees. Alphaville Herald. Retrieved online http://alphavilleherald.com/2008/05/irs-rules-in-wo.html

Morgan, M. (2011) The freelance marketplace review. Media Solutions International, Limited.

oDesk. (2011). Based on evaluation of available US-based contractors on May 2, 2011. Retrieved online http://www.odesk.com/contractors

Stephen M. Urquhart

Webster University

Author Note

Presented to Dr. J. Atwood, Ed.D.

In partial fulfillment of HRMG 5920, Compensation Management

Spring II, 2011


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