Tuesday, June 30, 2015

What if Uber goes unter?



Recently, a California court ruled that Uber has to treat its drivers as employees, with all the regulatory costs that entails. Most people think that this will hamper Uber a bit but not kill it. But a few, like Megan McArdle, think that the ruling spells Uber's demise. What if McArdle is right? What do we conclude?

First of all, it's important to point out that Uber might die for reasons totally unrelated to the California decision. Companies die all the time for reasons totally unrelated to regulation. Recent financial statements show Uber taking a pretty big loss at some point in the recent past, which might mean that competition has been a lot stiffer than expected. So if Uber dies, disentangling causality will be very difficult.

But IF the California ruling, and others like it, are what put a stake through Uber's heart, then I think we conclude two things:

1. Uber wasn't actually that amazing of an idea.

2. Our labor regulation is too stringent.

Why do we conclude #1? Because there are lots of ideas that absorb the cost of labor regulations and manage to keep on turning a profit. Wal-Mart does it. McDonald's does it. If you can't even clear that hurdle, your idea wasn't really creating that much value.

Why do we conclude #2? Because Uber is providing lots of people with work. Many people who would not otherwise be driving taxis are now becoming Uber drivers. That they are choosing to do this means that Uber is good for labor markets. In the interests of improving our labor markets, we should reduce regulations that keep people from doing jobs they'd be willing to do, as long as those jobs are safe and meet other minimum standards of quality (such as paying overtime). Assuming that Uber driving is a safe job that meets minimum standards of quality - which I'm willing to assume - we don't want to regulate the job out of existence. 

I suspect that neither (1) nor (2) is true. I suspect that Uber actually creates more than a tiny sliver of value, with its network effect and its circumvention of the local monopoly of taxicabs. And I also suspect that American labor regulations are not so onerous that they are putting large numbers of people out of a job.

Thus, I predict that the California ruling will not kill Uber. Uber may still die of other causes, but I don't think that being forced to call its employees "employees" will do it in.

34 comments:

  1. Anonymous8:02 PM

    But wouldn't an investigation about the labor conditions of Uber drivers be required before any conclusion is made?

    Also, taxi cab drivers unions are protesting Uber in France and São Paulo city council just forbade the service altogether.

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  2. Uber is not going away if some divers become employees. This ruling only effects California and a single driver, as stated by an article by Forbes:

    http://www.forbes.com/sites/quora/2015/06/30/the-california-ruling-on-uber-drivers-would-be-disastrous-but-its-probably-an-aberration/

    California did not rule that Uber drivers are employees. Rather, a single labor commissioner made that finding (not a ruling) in an informal, non-binding hearing that is based on the facts of the specific driver’s circumstances, applies only to that driver, is likely to be appealed, and is of no precedential effect. Other commissioners in other circumstances have found the opposite.

    -------

    If someone only becomes a driver once, how would they possibly become an employee/ That makes no sense, since they hardly have any involvement. The independent contractor model is as old as business itself, and Uber is one of the most successful companies to take advantage of it. The liberals, who whine about Uber all the time, ignore that obamacare is a contributing factor to the proliferation of the 'sharing economy'.
    Uber is a great idea whose time has time.

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    1. Sounds like a brochure! But sure, it's too early to tell what's going to happen with regard to the treatment of Uber drivers.

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  3. I think you presume entirely too much benevolence on the part of employers and too much labor elasticity on the part of the worker with point number 2. I do agree with number 1 on the basis of Uber basically taking advantage of the unofficial status of cab driver unions in most places and undercutting hard-won labor victories. Even if they don't fall apart from state-imposed labor standards or under-capitalization, the unions will catch up to them. The people need bread, yanno?

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    1. It's difficult to argue that Uber undercuts "labor", given that taxi unions are fighting to impede labor bids. Uber definitely undercuts one special interest for their own benefit, but that is ambiguous with respect to "labor". There is probably a better reasoning for point 1. Smith's version seems like a phrasing of survivorship bias. Survivors are suited to a regulatory environment, which is not equivalent to outperformance in different regulatory environments. The survivorship argument doesn't lend itself to an RPG like ability rating.

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    2. I said they undercut labor victories by entering the market as non-union.

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  4. And what do you think about Uber in France? Could it happen again in other countries in your opinion?

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  5. Chicago's taxi meter is now 50 cents a mile below what it was in 1981 when I showed up. Beginning in 1990 Chicago began adding subways to both airports, unlimited limos, free trolleys between all the hot spots downtown AND 40% more cabs.

    100,000 out of (my guesstimate) 200,000 Chicago, gang-age, minority males are in drug dealing street gangs -- I presume because they wont work for a minimum wage that is one-third below LBJ's peak ($11/hr), double the average income later. All -- virtually all -- minimum wage jobs in Chicago are filled by foreign born employees from the very poorest countries.

    Yet, all the above seems to fit your description of: "In the interests of improving our labor markets, we should reduce regulations that keep people from doing jobs they'd be willing to do, as long as those jobs are safe and meet other minimum standards of quality (such as paying overtime)."

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  7. Anonymous11:58 AM

    I wouldn't worry too much about the future of uber based on any "paper losses" you see. They're a young company. Amazon is very valuable yet has very slim profits. I believe google owns a large portion of uber. Is that still the case? I could see google using them to simply "plow the field" so to speak in all the different jurisdictions that hate them (or at least the local gov officials who hate them.. Riders like Uber otherwise they don't have to ride).

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    1. That's right. I'm just saying that companies can die for reasons unrelated to regulation.

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    2. Whether the reasons for death are 2 plus regulation or 22 plus regulation, if regulation is a factor it's fair to blame it, some. And unlike the human desire to go from point A to point B in the lowest cost time/money combination, and the fixed cost of the built streets, gov't regulation and enforcement are very much human decisions which affect the viability of the business model.
      In a developed economy, all new business model trials, like Uber, are uncertain. If the gov't regulations then change, and make it more difficult to survive, it should be called out as gov't killing the company.

      Gov't regulation is the big factor that is relatively least studied by economists trying to find out why the US economy has Stagnated for the middle class.

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  8. The reason Uber attracts drivers is because they lie about what they're paying. Most drivers at least remember that they have to pay for their gas, but they forget about the extra maintenance costs due to additional wear and tear on their car.

    An analysis I read a few months ago found that, starting with what Uber claims they pay a typical driver, and deducting the standard IRS allowances for mileage (which the IRS tends to set rather low), that Uber pays between 6 and 7 dollars an hour. And this is assuming that the driver does *not* pay for commercial insurance - which most don't even though they're required to do so by their insurance companies.

    In short, drivers are getting paid less than minimum wage - but they don't realize it because of the hidden expenses.

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    1. That's interesting. Got a link?

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    2. Wouldn't that play out through driver retention, then driver revenue share?

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  9. References on true Uber driver compensation –
    Last year Uber’s PR machine publicized that its New York drivers average $90k in income. In May 2014 Felix Salmon identified the first set of obvious flaws in the Uber calculations
    https://medium.com/@felixsalmon/the-economics-of-everyones-private-driver-464bfd730b38
    https://medium.com/@felixsalmon/how-well-uberx-pays-part-2-cbc948eaeeaf
    In June, Justin Singer took Salmon’s analysis even further, with greater emphasis on the ownership and depreciation issues.
    http://valleywag.gawker.com/beautiful-illusions-the-economics-of-uberx-1589509520
    http://justin-singer.org/blog/2014/06/beautiful-illusions/
    When a competent Yellow Cab company buys cars, it can get fleet discounts, very favorable bank financing and insurance rates, and can establish a centralized, efficient maintenance capability and the financial expertise to manage tax/depreciation/borrowing issues. If John Smith wants to become an Uber driver, he pays rack rates for the car, high rates for insurance (assuming he gets the legally required insurance) and is probably totally unaware of the actual, much higher depreciation and maintenance costs of intensive commercial operation (versus casual personal driving). These articles illustrate that the “Uber drivers probably clueless about true costs” and “properly calculated Uber costs fundamentally uncompetitive with competing companies” issues have been out there for a long time.
    As mentioned, the revenue side of the Uber driver equation is massively inflated by subsidies. See http://www.bloomberg.com/news/articles/2015-06-30/uber-bonds-term-sheet-reveals-470-million-in-operating-losses For every dollar of revenue it gets, Uber runs operating losses of $1.13. Among other things, those losses are subsidizing the driver payments needed to attract enough drivers to from other companies to support the Amazon-like growth rates that drive their equity “valuations”. But Amazon could point to massive, obvious operating efficiencies (warehousing, distribution, elimination of retail costs) obvious internet network/selling advantages, and humongous sustainable product quality advantages over traditional retailers. Uber can’t point to any sustainable competitive advantages, either now or at any future, mature stage.

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  10. Noah, can you provide some factual substantiation for your supposition that "I suspect that Uber actually creates more than a tiny sliver of value, with its network effect and its circumvention of the local monopoly of taxicabs"? You don't need to document the $50+ bn value Uber is claiming but at least enough to rationally explain how it could find huge profits in an industry where no one else ever has.
    The Uber business model has higher costs than any existing taxi/limo operator; scale and network effects across cities are tiny, its pricing/dispatch app is relatively insignificant (did Dominos valuation boom when they introduced an app?) and not a sustainable advantage (many cab companies have apps), and it is especially weak at what's critical for any transport company (the ability to carefully match its asset base against volatile, very peaky demand patterns). All current operating economics are being massively subsidized; the question is how a mature Uber would create value. Putting regulatory arbitrage and labor exploitation aside for a moment, their only clear advantages are their ability to create a PR buzz large enough to overwhelm media skeptism and political opposition. Have you ever seen a serious article, by someone who actually understood urban taxi/transport economics, that laid out how a mature Uber could produce better taxi service at significantly lower cost than todays operators?

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    1. Putting regulatory arbitrage ... aside for a moment

      But you can't do that. A taxi medallion in New York costs a million dollars - and that is essentially a dead weight loss to the economy. Uber eliminates that expense.

      It does seem that Uber is likely to be legislated out of existence around much of the world as a result of violence by taxi drivers.

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    2. The argument that Uber will benefit society by smashing evil taxi oligopolies is complete nonsense, generated by Uber's PR effort to create a fictional "villain" representing all the existing taxi/limo companies it hopes to put out of busness. There are only about 5 cities in America that have NYC type medallions; Uber's business plan depends on serving hundreds of cities that never had medallions. Medallions in cities like NY and Chicago weren't inflated because entry restrictions allowed medallion holders to earn obscene profits. Because medallions were tradable, they became valued as financial assets, and (like fine art) inflated as the demand for all categories of financial assets grew. If NYC had said that only medallion holders could operate taxis (i.e. retain the entry barrier) but eliminated tradability, it would have wiped out the artificial financial gains, but wouldn't have done anything to improve taxi operating economics. If you eliminate all entry barriers, taxi economics collapse completely. See (among others) Dempsey, P. S. (1996). Taxi Industry Regulation, Deregulation, and Reregulation: The Paradox of Market Failure. University of Denver College of Law, Transportation Law Journal, 24(1), 73-120.
      You are talking about (hypothetical) regulatory capture, whereby taxi interests cut back-room deals with regulators or City Hall to restrict entry so much that operating profits become artifically high. I was talking about the regulatory arbitrage Uber has been aggresively pursuing, whereby its competitors are forced to adhere to rules (driver screening and drug testing, commercial licencing and insurance) that Uber can blow off. Uber has never argued that the cost of any given regulations exceed their (safety, consumer protection, etc) value and should be elimiated for everyone. They've just said that because they have an "app", they should be free to ignore rules that apply to everyone else.

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    3. Your first and second paragraphs contradict. If regulation is not a deadweight loss, then an offering without the regulated "protections" should not be significantly more attractive than the regulated offerings.

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  11. Anonymous9:48 PM

    Good piece, but two points stuck out to me as being unusual to read on an economics blog.

    Firstly, the point about job creation. I thought economists tend to view creating jobs as a bad thing (no one likes to work, do they?). So in light of that, isn't your view about why #2 is true more properly phrased as how Uber is providing people with rides, not providing drivers with work?

    Secondly, I don't understand the part about "as long as those jobs are safe and have the quality of paying overtime". If the worker takes a job that is unsafe or happens to not have overtime, why would such a thing be objectionable if taking it was voluntary? From an economic perspective, of course.

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  12. El precio para el éxito es un trabajo duro, dedicación y determinación que hemos estado dando nuestro mejor esfuerzo para nuestro trabajo.

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  13. Taxi companies and pizza companies have been trying to classify taxicab and pizza delivery drivers as independent contractors for years, maybe decades. and have been unable to. The case that set the standard for "employee" vs "contractor" goes back to 1989 - and the standard is basically degree of control over the employee's work product. After reading the actual decision, it's hard to poke holes in the case - Uber does indeed exercise a high degree of control over the work product.

    Despite the case law that dates back to 1989, pizza companies and taxicabs still provide services and make money.

    Seems to me this is a tempest in a teapot - companies are always trying to get around the labor rules, and claim Harm!! if they cannot. If pizza companies still deliver, and taxis still provide service (taxis, I might add, have union labor) - hard to imagine forcing Uber to classify drivers as "employees" would actually kill Uber. It may make rides more expensive. Maybe.

    If Uber creates any sort of value, they ought to be able to compete and stay in business.









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  14. Why do you conclude 2 if Uber fails? A lot of the costs Uber avoids don't relate to labor. What about insurance, vehicle safety, driver background checks (Uber does background checks, but they don't match the actual driver to the screened driver)? Uber avoids paying for these risks and they end up borne by the customer, who will only find out after the fact if something goes wrong. On top of that, the labor cost "savings" are borne by the drivers - payroll taxes, unemployment insurance, workmans comp. These "savings" may not be paid at all, which could be welfare reducing as markets are incomplete in the real world. We require these payments for a reason. If they are paid, then the result is a transfer to Uber from the driver - not a savings. If they are not paid - we have a transfer from tax payers to Uber and the driver - not savings.

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    1. "the labor cost "savings" are borne by the drivers"

      Are they? I was wondering that as I was typing my post.

      The correct answer is that: It depends on labor supply and demand elasticity. It also depends on a whole bunch of other unknowable things, like the tax wedge between the company and the employee.

      Independent contractors have to pay the employer share of FICA and other payroll taxes. They may self insure for unemployment and workmans' comp (although there is market for some insurance among the self employed too).

      Whether a person is better off as an independent contractor or not is is a function of personal circumstances. Not everyone values the "benefits" of being an employee.



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    2. And how often are yellow vehicles that look like cabs checked for appropriate credentials?

      The Uber claim (which is quite plausible) is that a combination of automated record checks and machine learning based on driver history are equally able to ensure safety. Frankly, given the fact that murderous attacks are so so much less likely than death in traffic accidents makes this very compelling.

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  15. One aspect of the Uber business model that doesn't get much attention is that both Uber and conventional taxi businesses take advantage of public regulation of driving. Drivers must pass tests at public DMVs and buy insurance, traffic is expensively policed from local budgets, drivers who break rules get marks on their record and pay more for insurance or lose their licenses.

    By tradition the cost of that regulation is broadly shared among the general local tax pool, plus taxi businesses pay extra. It's not a totally unreasonable solution, though I'm no fan of the medallion system and other ways of creating rentiers.

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    1. Yes, and restaurants take advantage of public support for reading and writing (people can read their menus, waitresses can write down orders). This doesn't demonstrate that there should be a special tax on restaurants to fund schooling.

      Rather than imposing greater costs on the public Uber reduces the cost of public regulation of driving because less people need licenses, less cars need registering etc.. In general the reason we create public goods (roads, schools, trains) is to encourage people to use them to create more productive economic activity.

      We don't say "ah ha...bike messenger you wouldn't be able to do your job without streets....we need a special bike messenger tax."

      Yes we generate revenue from taxi medallions but it's not properly viewed as something that businesses that use driving owe as a matter of fairness.

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  16. I do not see anyone replying to Mr. Horan who's well researched posts totally eviscerated all the bog posts and juvenile whining about government regulations.

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  17. Am surprised no one has linked to
    http://citypaper.net/uberdriver/
    http://citypaper.net/uber-driver-tricks/

    which are the best first-person investigative accounts I've seen.

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  18. Indeed, there is a network effect to transportation companies like Uber, so you know, a well-regulated monopoly is the optimal solution in this line of business. Uber has big plans: to get the monopoly but not the regulation.

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  19. Anonymous8:33 AM

    One problem that is now visible in Germany with the idea that regulations that can close companies should be removed: Germany has changed (relaxed a lot) its labor regulations around 2000-2005 and now have 4.7% unemployment rate. But Germany has several million people who work, but are below poverty level, and there is basically no wage inflation.

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  20. Your argument that a sufficently good idea should be able to overcome labour regulations is unconvincing. Whether or not that is true depends heavily on how many employees it needs to make use of.

    For instance, if you figured out a way to sign up half the planet to work for 1 minute a day (say doing surveys so it's capped at 1 minute) to create $1 worth of surplus value in that minute that's an absolutely incredible. That's over 1 trillion in surplus value a year.

    However, if the labor regulation overhead of a single worker are $400 a year your idea won't be profitable given these regulations.

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