Ridesharing companies Uber and Lyft almost exited California last week over a dispute regarding their drivers’ legal status. In 2019, the California legislature passed Assembly Bill 5 (A.B. 5) making the companies’ drivers employees and not independent contractors. A judge stayed an August 20 compliance deadline. Politicians’ efforts to restrict contractors could arrest the development of the sharing economy, hurting us all.
All work in a market economy must be voluntary. I must induce assistance I would like from others, which usually involves paying them money. If I run a business and want a task done repeatedly, we might formalize this into employment, as governed by law.
Voluntary employment makes both parties better off. Suppose I paid someone $50 to rake leaves. (This is a hypothetical, as I live to rake leaves.) I would prefer to pay the money to doing the work myself, and the person doing the work must prefer the $50.
Our national, state and local governments pass laws regulating employment. The laws impose payroll taxes, regulate wages (minimum wages and overtime pay), require workplace safety, and mandate benefits family leave and health insurance.
A business will only hire an employee if she generates enough value to cover the full cost of employment. Mandates and taxes make hiring employees more costly, reducing employment and potentially forcing businesses to close.
Employers would voluntarily offer many government-mandated benefits. Managerial economics recommends offering fringe benefits and improved job conditions valued by workers more than they cost to provide. If Walmart made cashiers work a six-hour shift without any breaks, hourly pay would likely have to be significantly higher. And some mandated benefits, like parental leave, will benefit some workers and not others.
The law offers independent contractors, with many fewer mandates, as an alternative to employment for businesses to hire for short term or limited positions. People can also put together “gigs” as independent contractors for several different employers to earn a living.
Not surprisingly, businesses try classifying workers as contractors instead of employees to avoid mandates and taxes. California’s A.B. 5 attempts to rein this in. In addition to Uber and Lyft drivers, A.B. 5 significantly affects free-lance writers.
Many people see greed behind classifying employees as contractors. One of sponsors of A.B. 5 wrote, “California is home to more millionaires and billionaires than anywhere else in the United States. … One contributing factor is we have allowed a great many companies … to rely on a contract workforce, which enables them to skirt labor laws [and] exploit working people.” Owners get rich while impoverishing independent contractor workers.
There’s a problem with this narrative, however, namely that Uber and Lyft lose money. Uber has set records for losing money, including $5.2 billion in the second quarter of 2020. Of course, losses for the stockholders do not mean that some executives have not been well-compensated.
I think that more frequently businesses with thin margins turn to contractors because they cannot afford employees. Analysts estimate that reclassifying drivers as employees will increase Uber’s and Lyft’s labor costs by 20 to 30 percent. This is particularly burdensome in the sharing economy, which requires innovative was to utilize idle resources. Ridesharing uses drivers’ personal vehicles and available time to provide rides when demanded. While some people drive for Uber and Lyft full-time, the companies bring thousands of cars into service for a few hours a week.
Sharing businesses benefit us all. Economic studies document declines in drunk driving after Uber and Lyft begin operating in cities. Grocery shopping and delivery services like Instacart have helped Americans stay safe during COVID-19. The cost of government mandates on employees can prevent the unlocking of this potential value.
Companies in the sharing economy are experimenting with innovative ways to create value. These experiments use labor very differently than in manufacturing or retail. Reducing government-imposed burdens may be a better way to get more Americans hired as employees than disrupting the sharing economy.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.