What happens if the Uber fueled gig economy destroys earning potential?

Den Howlett Profile picture for user gonzodaddy November 4, 2016
Summary:
The Brookings Institute revises its recent research asking whether regulators need to move quickly to align what's happening in the gig economy with protecting worker rights. This has profound implications for everyone. Uber is both the poster child and the test bed for any change in the regulatory framework.

uber and taxi
A fresh take on US census data published in the Wall Street Journal asks the important question: Is the Gig Economy Cannibalizing or Creating Jobs? Here’s Some Early Evidence. The analysis builds upon work undertaken by the Brookings Institute into labor trends and which we further analyzed for the purpose of discovering earnings trends.

At the time, Brookings said:

Platform-based freelancing is not yet substantially displacing payroll employment—but that could change. Despite the uptick in nonemployer contractors, payroll employment in “rides and rooms” industries has not declined during the last five years. Instead, payroll employment has increased in these industries, particularly in the passenger ground transit sectors.

Today, Brookings say that:

...a picture emerges that is by no means definitive but that suggests—to my eyes at least—that the spreading gig economy (at least in the case of ride-sharing) is, in fact, substituting for some payroll employment, or at least depressing its growth.

To be sure, a first reading of the data lends credence to the view held by enthusiasts of the “sharing” economy that Uber and Airbnb are serving unmet consumer demand or stimulating new demand—and so are creating new work opportunities that complement those in existing taxi or hotel companies...

...However, payroll growth in the two industries looks surprisingly weak by our count.  And I believe that a closer look at the metro-by-metro data suggests that platform freelancing was already substituting for some payroll employment and cannibalizing it in the 2012-2014 period.

As I said before, the data is out of date and the raw numbers of people reporting in the gig economy doesn't tell you a great deal beyond the fact that more people earning more than $1,000 a year are reporting. I believe the more important data is in the actual earnings and here, and once again we're talking limited data, there is a downwards trend as evidenced by this graphic:

taxi-and-limo-non-employed-earnigs

Citing a McKinsey report, the authors note that as many as 68 million Americans regard themselves as 'independent' workers although the same report says that only 15% of the total have used a digital platform like Uber. McKinsey estimates some 162 million people in Europe and the US classify themselves as 'independent' workers. McKinsey's analysis is important because they have endeavored to categorize how these independents see themselves. They come up with the following analysis:

mckinsey-independent-workers

To my mind, the most important distinction in this analysis is that 30% of those surveyed are either 'reluctant' or 'financially strapped.' Then there is the 30% who view independent work as supplemental to another income. Taken together those statistics supports my and others view that the so-called US middle class is under pressure, even though there has been good news on economic growth.

Brookings shifts gears in its latest report saying that within a decade, as many as half of the US workforce could be non-payroll workers. That has important implications:

...the shift to alternative work arrangements matters for policy makers because it represents a fundamental reorientation of the social contract within which millions of Americans work...

...In short, the expansion of the gig economy—left to itself—is likely going to contribute to larger trends that are reducing the share of American workers that can achieve basic economic security through their work...

...Given that, the question becomes not just whether the gig economy will supplant large portions of the payroll economy,  but how can the technological and business-model innovation of the gig economy be managed and enhanced to ensure it helps deliver a measure of economic security for the millions of Americans who are beginning to depend on it?  Whether it is about benefits contributions by gig-economy companies, portable benefits accounts, or new kinds of safety nets, the conversation needs to widen as fast as the gig economy is growing.

(My emphasis added.)

These are interesting observations because most people I have spoken with do not consider the issue of a social contract as relevant to the independent worker economy and the gig economy in particular. Instead, they tend to the view that an independent contractor is no different to any other self employed person. That conforms closely to the Uber line, which is increasingly coming under challenge.

Most notably, that challenge came recently in the UK with a London employment tribunal case where the judges ruled that Uber drivers are 'workers' and therefore have rights to minimum pay, holiday pay and so on. Those same workers do not have the same rights as employees much as is the case in the US.

I have consistently said that if the UK case is upheld then it presents a significant problem for Uber because calculating what constitutes a minimum wage is not just an hourly computation that may or may not include actual work done, but also that each driver's cost profile is different. I also believe that rather than providing an incentive, Uber will be inclined to only offer minimum wage contracts.

Regardless, it now seems that we are reaching a point where local or central governments will have to step in and mandate how the independent worker economy and the gig economy in particular is to be regulated such that workers are protected while maintaining a competitive marketplace. To that extent, there seems to be an emerging view that:

But  then as late as July this year, UK government officials were emphatic in their enthusiasm for letting the gig economy thrive with as little regulatory pressure as possible. That may be fine on the demand side but ignores the supply side problems and most notably the impact on earnings.

In the US, the issue of regulation could take on a special sense of urgency when more people see how public sector employees are compensated. For example, we recently saw the extreme case of the BART janitor who made more than $270,000 in pay and benefits in 2015. That was achieved by working an average 114 hours a week. But then compare that with one of the claimants in the London Uber case who believes that drivers are being edged towards a 90 hour working week just to maintain a living wage. Is that fair and reasonable?

Assuming regulators step in, Uber will still be faced with multiple operational problems. From sifting through online resources and conversations with others, Uber operates differently in different cities and in different countries. In some places Uber provides fixed fares in exchange for a modest up front commitment on a monthly basis. In other places it provides the customer with a fixed fee and no breakdown what that constitutes. Elsewhere, a combination of time, distance and other fees make up the fare. And then there is surge pricing. Quite how that works on the driver side remains a mystery and how regulation will cope with those varying models is, again, difficult to unravel.

We will continue to watch this unfold because the broader implications for independent contractor working practices will have a profound impact on business models and the technology that supports them and especially as more companies realize that a flexible workforce provides opportunities to improve efficiency and productivity.

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