Good thread question.
Perhaps things are broadly the same as they are in X Factor, where the finalists are paid a nominal wage (of around £100 a week) and provided with free food, transport and accommodation.
Some X Factor contestants have been allowed time out from understanding employers, or they work on a freelance/self-employed basis - which I think Danyl Johnson does as a music teacher at 3 schools. In exceptional cases, like Maria Lawson, they have a husband with an £8 million property portfolio or can otherwise afford to 'invest' in this opportunity.
Others, perhaps most, are amateur singers/musicians anyway, so for them appearing on TV and being paid for it is much the same income as a residency at a pub or club. It seems Idol's Crystal has been a busker before. The nominal wage and board/lodgings keeps them from having to scrape by, or claim benefits/welfare.