The Gig Economy and the benefits debate

Last week, The Washington Post published an op-ed about "California's high-stakes game of chicken with Uber and Lyft."

The article tells the story of Uber's and Lyft's battle with the AB5 regulation in California. 

Specifically: 

"Most recently, Uber and Lyft, based in San Francisco, announced they would close their California operations after a court-ordered them to reclassify drivers as employees. They're still running at the moment, having secured a last-minute stay, pending appeal, but ultimately, unless that appeal proves fruitful or the law changes, they say they're pulling out."

The article makes the point that the pandemic is the wrong time for this type of debate when both unemployment is soaring, and more people need transportation modes.

Of course, this is a much longer debate, and the pandemic might not be the best time to settle it. Still, it accentuates both the benefits and drawbacks of the gig economy. On the one hand, the fact that gig workers do not have any benefits has become more acute in times of distress. At the same time, with increased unemployment, where most mobility and hospitality firms (airlines and hotels, for example) are preparing for massive layoffs and cost-cutting, Uber and Lyft (as well as many other gig work platforms) offer the type of flexible work that can allow at least some compensation.

I want to go a bit deeper into this debate. First, it is essential to understand the regulation itself:

"If drivers were classified as employees, Uber and Lyft would be responsible for paying them minimum wage, overtime compensation, paid rest periods, and reimbursements for the cost of driving for the companies, including personal vehicle mileage. But as independent contractors, drivers receive none of these benefits."

Which immediately brought the response from the CEO of Uber:

"If the court doesn't reconsider, then in California, it's hard to believe we'll be able to switch our model to full-time employment quickly," he told MSNBC.

The question, of course, is whether this is just a matter of speed. Is it merely extortion, or is it a systems issue, and the firms just need more time? Is the Uber model even viable if forced to fully employ the gig workers? 

First, it's important to remind everyone that the firms themselves are not profitable. So, who is funding these firms (and the cheap, highly available drives we get)? Investors (and since these are now public firms, our 401K's, university endowments, as well as retail investors), the drivers (by taking a lower pay than what they could have gotten somewhere else) and us (by agreeing to pay a higher price when other modes of transportations are not available).

Since the transportation markets are competitive and the labor market for gig workers (in many cities) is also quite competitive and fluid, I don't think one can assume that the latter two are funding the losses. These are primarily investors betting on the growth of this industry and these firms' ability to monetize that into profitable growth. But that also means that when we look at any policy change, we have to examine these three stakeholders (and potentially others). 

So, let's first understand the implications of these changes on drivers. New York can be viewed as a partial experiment for this. Workers are paid minimum wage, including payment for breaks (by accounting for utilization), as documented here: Uber restricted access.

"Uber on Tuesday will begin limiting drivers' access to its app in New York City to comply with regulation aimed at boosting drivers' pay and easing congestion in Manhattan, laws that Uber says will have unintended consequences."

It is important to say that unlike the behavior in California, this was not a retaliatory action, but rather the optimal action given the new (complex) reality. Given that Uber had to guarantee a certain level of pay, the only way to guarantee it is to ensure that the number of drivers is lower, reducing the competition on drives (but also reducing availability). This leads to the question of whether this is a desirable outcome, but that has to be examined from the point of view of society.

What's the impact on society at large? One should agree that we don't have to take only the economic perspective (what Marx called "Commodity Fetishism"). We can allow voters (those who voted to approve AB5) to use their value system to subject firms and their residents to these values. In other words, one has to agree that people can vote in two ways: with their votes and their pockets, and it is absolutely acceptable to require firms to maintain a certain level of labor conditions, even at the expense of more expensive services, and lower labor mobility.  

But that brings me to a fourth stakeholder: the residents and business owners who are neither the platform nor the gig workers. A recent paper shows that there are significant benefits with the entry of ridesharing (specifically, UberX). The paper measures how local economic activity responds to changes in access brought by the entry of UberX to an area.  

"After ridesharing's entry, restaurant net creation doubles in previously inaccessible locations, from 5% to 10%. As these areas open up and become more attractive, the median house price rises by 4%, and rents rise by 1%. Homeowners are willing to pay $1,060 per year for ridesharing's entry, as user costs fall. Renters are willing to pay $430, as they do not realize capital gains."

Not all of these benefits need to disappear with the move to an employment model. Still, even if the only innovation is in the employment model, and with it the ability to allow for quick entry into markets, these are not insignificant numbers.

The CEO of Uber recently wrote a New York Times op-ed: I Am the CEO of Uber. Gig Workers Deserve Better. The suggestion is to allow the firms to pay benefits, potentially in a pro-rated way, but without full employment restrictions. 

While the focus is on Uber and Lyft, it is clear that the gig economy has the potential to be a much more significant part of our economy. With more micro-pods emerging for K-12 education and teachers moving between these, rather than staying with one school, and with firms such as Catalant and Upwork helping firms tap into resources they cannot afford to fully employ, but also allowing individuals more flexibly, it is crucial to think on whether we need a new model for benefits and working conditions.