Social Capital, Economic Opportunity, and Multi-Level Marketing

Project Start:01/2018
Researchers:Claes Bäckman, Tobin Hanspal
Category: Household Finance
Funded by:LOEWE

Topic & Objectives

Labor markets are changing. A recent trend is the rise of alternative work arrangements, e.g. demonstrated by the rise of Uber and similar companies who supply a product or service but do not formally employ the individuals who sell those products or services. The share of employees in alternative work arrangements rose by more than five percentage points over the past decade, from 10.7 percent to 15.8 percent of the labor force in the United States – a share that is likely to increase as technology advances. Whether this trend is positive or negative for workers is debated, where proponents argue that workers are now able to flexibly set their own schedules and thereby increase their labor supply, and detractors argue that independent work makes for income that is more volatile and allows companies to avoid paying benefits to workers. The key in evaluating the relative importance of these two arguments is to understand what kind of people participate in alternative work arrangements, since this would enable us to determine how many workers gain from flexibility and how many lose from increased insecurity. 

In this project, we describe the participants in a specific form of intermediated work – direct selling – through a multi-level marketing (MLM) firm. In an MLM business, individuals join as independent contractors and sell goods provided by the company to their own customers. The business model relies on individual retailers' commission-based product sales direct to customers and on their ability to recruit new members into the company. More than five million Americans had a part- or full-time involvement as a business builder in a direct-selling company in 2016, corresponding to approximately three percent of the labor force. The total number of Americans involved with direct-selling companies increased by 30 percent from 2011 to 2016. 

We use data from a Freedom of Information Act to the Federal Trade Commission (FTC) to investigate the geography and determinants of participation with a specific MLM firm. Our data consists of 350,000 individuals who lost money running an MLM business between 2009 and 2015, and whom the FTC reimbursed for a fraction of their losses. We link the participants to a county and examine how county-level determinants correlate with MLM participation, allowing us to evaluate if this type of business attracts individuals who are likely to value flexibility or if it attracts individuals who would value income security but are unable to achieve it. As most individuals who join an MLM do not experience any financial gains (in contrast to the often rosy marketing claims), we also evaluate if higher losses are concentrated in areas where individuals can afford them.

Key Findings

  • Our results suggest that MLM incidence is higher in middle-income areas as well as in areas with relatively high female labor force participation. 
  • We do not find strong evidence that MLM activity is a substitute for unemployment, but we do find some evidence that MLM activity is correlated with certain types of entrepreneurship. 
  • We also find a positive relationship between financial development, i.e. a higher concentration of financial institutions, and MLM incidence. 
  • We find a larger negative impact of MLM activity in counties with a higher Hispanic share, in counties with lower education levels, and in counties with higher income inequality, suggesting that vulnerable individuals are more likely to participate in this type of activity. 

Overall, our results indicate that the pattern of MLM participation reflects a high value of flexibility, but also that the losses are concentrated in areas that can ill afford to make them. This suggests that the demographic groups most drawn to flexible working arrangements may also be the most vulnerable. Our results highlight the need for further research into the distributional aspects of changing labor markets and financial vulnerability. 

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
207Claes Bäckman, Tobin HanspalParticipation and Losses in Multi-Level Marketing: Evidence from an FTC Settlement2018 Household Finance Intermediated work; Multi-level marketing; Gig-economy; Entrepreneurship; Con- sumer financial protection