What is Shadow Labor ?

Shadow work is not an official term that has been coined by mainstream economists. Instead, it is a term used to loosely refer to services that humans have to provide for each other without being paid. For all of economic history, shadow work has not found any mention in economic history. This is because it was not considered to be an economic factor at all! However, as we will see in this article, shadow labor is being utilized as a strategy by several corporates, and hence it has some very significant ramifications. In this article, we will understand the concept of shadow labor in detail.

What is Shadow Work ?

Shadow labor is simply labor that arises out of your employment opportunities. However, you are not paid for the same. Consider your normal employment opportunity. Along with doing the office work, you also have to commute to work. This commuting is also related to your work. However, you are not compensated for the commute. Similarly, you need to maintain your car or arrange for someone else to maintain it; you need to fuel your car and service it. All this also entails labor. However, it is not included in your labor agreement and is almost never compensated. The reality is that shadow labor usually involves mundane tasks. Since these tasks are so small, they are often not accounted for and people don’t mind doing these tasks. However, several thousand repetitions of these tasks add to a significant amount of labor.

Several corporations have realized this and are using shadow labor as a competitive strategy to drive down their labor costs.

Shadow Work as Competitive Strategy

Consider the average gas station in America. Their net profit margin is around a dime for every gallon of oil that they sell. Now, imagine the gas stations being manned by humans. Given the high wage rates in America, companies would have to sell 80 gallons of oil every hour just to break even on the salary, taxes and other compliance costs. The other alternative would be to raise prices which would lead to a drop in demand. Companies like Royal Dutch Shell and Chevron have found a way around this. They simply made the gas stations self-service.

With the use of technology, people now have to pay at gas stations, then they themselves have to perform tasks required to refuel their tanks. For an individual that does not amount to too much labor. However, when several thousand people gas up on their own, a significant amount of savings accrue to the company. Companies like McDonald’s have also utilized this concept. They ask customers to perform their own tasks and save labor costs as a result. This same concept is also being taken to the banking sector. Most banks in America have the vision of achieving branchless banking in a few years i.e. everything will be digital and therefore performed by the consumers themselves. This would give banks cost advantage, and they can use this advantage to price the competitors out of the market.

How Shadow Work Leads to Unemployment ?

Worker unions are often agitated over companies outsourcing their work to low-cost locations offshore. However, the bigger threat right now is companies outsourcing their work to the customers themselves. This is a win-win proposition. It saves the company money whereas it saves the customer’s time. Also, customers report that having more flexibility makes them feel better leading to higher customer satisfaction levels. Self-service is often compared to being the assembly line of the service industry. It enables companies to serve more people at a lower cost.

Badly done self-service can be a horrific experience for the customer. It often leads to a series of endless menus with options to choose from. This confuses the customers and they are often unhappy as a result. It saves the company money in the short-run, but such ineffective shadow labor often drives the customers towards the competition. If self-service is being implemented, it is essential that the implementation is done in a manner that it provides value to all the stakeholders.

How Shadow Work Ought to be Implemented ?

Shadow labor and self-service are important ways of conducting business. They cannot be simply avoided. However, they need to be managed effectively. Customers are often happiest choosing self-service when they choose to do so. Consider the banking industry. Most customers prefer to transact online even though there are other banking channels available. If the choice is forced on the customer, they tend to dislike it.

The correct way to implement self-service is to first provide it as an option to the customer. The customer must then be incentivized to use this option by making it cheaper than other options. Gradually, over a period, the other options must be phased out.

To sum it up, shadow labor is now an important economic concept. Firms need to include this is in their strategy. Shadow labor along with the right technology can substantially drop labor prices for any company. In some cases, labor prices can be completely eliminated by using shadow work.