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Why the sharing economy could have a hard landing in Australia

The road ahead could be gloomy for some in the sharing economy. Image sourced from Shutterstock.com

Why the sharing economy could have a hard landing in Australia

The road ahead could be gloomy for some in the sharing economy. Image sourced from Shutterstock.com

Last year Deloitte Access Economics reported the sharing economy contributes about A$504 million a year to the New South Wales economy, with about 45,000 people earning an income from the different platforms like Lyft and Uber for ride sharing, and Airbnb for accommodation.

In the initial phases of their introduction, these platforms provided good money for providers, much to the annoyance of heavily protected suppliers such as the “official” taxi industry. Some taxi drivers actually switched to Uber in the hope of greater incomes.

Though not as widespread as in the United States, activities in the sharing economy in Australia include many services such as house-sitting, car sharing, bike sharing and IT services.

But for those in the “gig economy” there is evidence emerging that markets for services like Uber and Airbnb are becoming saturated. Expectations on income prospects are being lowered.

Recently in Brisbane and on the Gold Coast, some Uber drivers have complained of making less than $A10 an hour after deducting GST, personal income tax, car and phone expenses and Uber fees from their fares. This compares to the minimum wage of A$17.29 which, although subject to income tax, is greater than the drivers claim they are getting from Uber. The company also announced it was scrapping guaranteed hours) for drivers after their first four weeks in the service.

As the profitability of activities falls we will likely see a drop in people working through these platforms or offering services. For us economists these developments are hardly surprising. As we say in Essentials of Economics: “If everyone can do it, you can’t make money at it.” By this we mean that in markets which are competitive with relatively easy entry and exit, suppliers can’t expect to make above the average return for long. In this case that means earning above the average wage, or for the less skilled, the minimum wage or even unemployment benefits. If activities are profitable then people will enter the market and drive down prices.

Everyone can do it

There are few markets that have easier entry and exit than those in the sharing economy. Anyone with a car (which is most people) can become an Uber driver. Anyone with a spare room can offer it on Airbnb. The same goes for house-sitting, car sharing and most of the other services now available in the sharing economy.

Also, the price which suppliers are willing to accept will be determined by the value of the alternative uses of their time, room or other asset they are “sharing”. So a person who has a regular job and finds it convenient to spend an hour or two of otherwise idle time, might be content with a relatively low payment from Uber. But such an hourly rate for a driver relying on Uber for a living might not.

A person who has an empty room in their house might find even a relatively low payment is better than nothing at all. But if you relied on income from the room to make a sizeable contribution to the household budget you might find Airbnb a rather unattractive proposition.

The lesson in all this is that markets will adjust to a price where people are just deciding whether to undertake the activity or not and many will be unwilling to take part at this price. The big profits to be made are in the firms which bring buyers and sellers together, usually through app-based methods. But even here these profits are subject to serious competitors not being able to enter the market.

All of these factors explain why the sharing economy has really taken off in the United States where minimum wages are low and social security payments (both the level of payment and accessibility) are relatively poor. In a country such as Australia which has relatively high wages in “mainstream” employment (even at the minimum wage) and relatively generous social security it is doubtful if for most, the sharing economy will ever compete with a full-time job as an attractive proposition. But then again, the very point of the sharing economy is that it is a part-time, somewhat casual activity compared to the “mainstream” economy.