Most dictionaries say that the origin of "gig" in this sense is unknown, but it really doesn't seem that great a mystery. Appearing in English in the 15th century, "gig" meant something that spins, as in "whirligig." Subsequent meanings included "joke," "merriment" and (aha!) "dance." Since playing at parties and dances is every musician's meal ticket early in their career, it's easy to see how "gig" became generalized to mean any paying job.
The Grove Dictionary of Music and Musicians describes the term as meaning "A term commonly applied to a musical engagement of one night’s duration only; to undertake such an engagement."[1] The first documented use of this term in this way appears in 1926: :1926 Melody Maker Sept. 7 One popular ‘gig’ band makes use of a nicely printed booklet.[2]
According to Richard Digance on UK TV Channel 4's Countdown, this definition derives from a small carriage in New Orleans, Louisiana known as a gig, where black musicians could perform, so they would not be arrested for playing on the street.
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