In recent weeks, Uber is alleged to have lowered wages and raised prices to gain the favour of capital markets ahead of its May 9 Initial Public Offering (IPO), the largest one in years. This alleged change to fee structures has galled Uber drivers who don’t expect to reap much of the benefit of the IPO. In response, drivers in several major U.S. cities say they will turn off their apps for two hours on May 8, as part of a coordinated National Day of Action.
Uber is one of the most successful firms in the “gig economy,” which is now comprised by a wide range of industries, including couriers, educators, journalists and carpenters, among many others.
On paper, work in the gig economy sounds great.
Workers have flexible hours, and can usually work whenever and however much they want. This means they can supplement their income from an existing job, make income in between jobs or even do full-time gig work. Firms have lower labour costs because they don’t have to spend on vacation pay, sick pay and other worker benefits, and don’t have to invest in worker safety, which is left up to the worker.
Crucially, they also don’t have to worry about paying workers when there is no demand for their service. If no one needs a ride right now, Uber effectively has no labour cost. This lack of income security is a primary source of the rising tension between workers and firms. In the gig economy, firms legally treat workers as independent contractors as opposed to permanent employees.
A recent opinion letter on contract workers written by the U.S. Department of Labor confirms that this isn’t likely to change any time soon. The implications are significant; it means workers have essentially no job security, either in terms of employment or wages.
Little to no union presence
Worker benefits, safety and job security are all terms of employment that have historically been won and maintained by unions. Unions have little to no presence in the gig economy, due largely to opposition from firms.
It is probably not surprising that firms, especially ones in the gig economy, are opposed to the unionization of their workers. Widely accepted economics literature shows that unions raise worker wages, especially in low-skill work.
But another study — perhaps more relevant to the gig economy — which looked at private sector firms in the United States over three decades found that unions significantly decrease the long run equity value (as measured by the stock price) of publicly traded firms. That study concluded that unionization has a particularly large effect on stock price when worker support for unionization is large, as it is in the ride-sharing industry.
So not only do firms like Uber want to avoid worker unionization to keep labour costs low, but, with the IPO looming, these firms probably also have an eye on their future equity values.
Benefits of collective action
The strikes on May 8 are being organized by groups such as “Rideshare Drivers United” a group of Uber and Lyft drivers “who are building (an) organization to fight for the dignity of our work and better lives.” These groups are being aided by national advocacy groups such as Gig Workers Rising. In practical terms, the groups organizing the strike are playing the role traditionally played by unions.
Unions solve what social scientists call a “collective action problem.” It is easy to see why organizing a strike, for example, is difficult. Suppose you are an Uber driver in Los Angeles on May 8 and you expect all the other drivers to turn their apps off as part of the Day of Action.
You could make a lot more money than you normally would by being the only Uber driver in Los Angeles with her app on. In his classic 1965 work on the subject, Mancur Olson explains why large groups suffer from this type of “free rider” problem, which helps explain why small groups (i.e., dairy farmers) have an easier time organizing and influencing policy than do large groups of workers.
While workers in the gig economy could potentially benefit from a union, the timing could hardly be worse. In the U.S., union membership has been on the decline for decades. Moreover, the current political climate in the U.S. makes this a harder time than ever to form a new union.
Unions have long been a reliable source of both votes and campaign funds for the Democratic party. With this in mind, Republicans in several U.S. states have sought to cripple unions by enacting “right to work” legislation, which gives employees the right by law to work in unionized workplaces without being a dues-paying member of the union.
A recent paper by economist James Feigenbaum at Boston University and his colleagues finds that these laws have indeed been effective in reducing Democratic success at the ballot box. Unionization isn’t a likely solution to the woes of gig economy workers in the near future.
A role for government?
Few would argue that Uber has made life better for customers — there is a reason it has so severely disrupted the industry. But in the absence of an effective organization to advocate for its workers, the business model that makes Uber so successful presents complicated challenges for government policy.
Gig economy workers make costly long-term investments that tie them to employment in their chosen gig. In the case of Uber, this means buying a car and paying for the related costs associated with insurance and meeting safety standards etc. By contrast, Uber is not tied to any particular driver in the same way. The result is that many gig economy workers are just a small wage cut away from dire financial straits — or worse.
Economic security of workers in the gig economy is not the only issue for government policy as firms like Uber continue to expand their presence. By virtue of its own success, Uber has also significantly hastened the decline of the taxi industry, leaving taxi drivers in many cities heavily underemployed.
Some drivers close to retirement age have seen their retirement plans disappear as the value of taxi medallions (permits) have plummeted. The toll on the mental health of these workers has been so significant that suicide among drivers is now a noticeable pattern, and has led to calls for government intervention and taxi strikes in cities from Montréal to Madrid.
Free market competition and the entrepreneurship and innovation it is capable of generating is undoubtedly a great source of consumer welfare. The same is not always true for workers. Policymakers would be wise to take action while the situation is still manageable.