Unless you read the Wall Street Journal or frequent the BBC website, you might have missed the story about the U.K.’s top court ruling a specific group of former Uber drivers was, in fact, employees and deserved minimum wages and benefits. While the decision doesn’t extend to all current Uber drivers, it isn’t too much of a stretch to imagine it eventually will, at least in the U.K. From there, perhaps it will be only a matter of time before it spreads throughout the remainder of The Commonwealth, even if the other countries in it have their own judiciaries.
Although I admittedly have never worked in the gig economy, I feel the need to say: “be careful for what you wish, as you just may get it.”
You see, one of the main differences between being an employee and being an ‘independent contractor’ is who owns your time. If you work for someone else, they do. As a result, they can pretty much give you the old “who, what, when, where, and why.” Further, if they are paying you, they will need to see a return on their money. Think you will be able to ‘turn on the app,’ hang out at the end of a cul de sac for a few hours, and collect your pay? Think you will be able to collect the fares you generate plus your minimum wage? Think you will really be able to set your own schedule and determine where you want to work? Think again.
To be sure, for some workers, this might be preferable. They would prefer the more certain income and access to some form of corporate benefits, slight as they may be. Given the economic upheaval of the last 12 months or so, this might actually be a lot of workers. However, the loss of flexibility will be incredibly unattractive once ‘we’ get back to some form of economic normalcy.
Further, what do you think will happen to the number of, say, Uber drivers IF the company has to classify them all as employees and everything that entails. You think the company will hire more folks? Let more workers have access to the app? Put a bunch of folks on the timeclock and let them drive around less densely populated neighborhoods hoping for a fare? Again, think again.
It is nothing more than math. You see, right now, an Uber driver’s wages are largely, if not completely, variable. If they don’t earn a fare, the company doesn’t pay them. But what happens when employee related costs go from being largely variable to largely fixed? What do you think the CFO’s office will want to do with those costs? I think you know the answer, and it isn’t increase them.
So, not only will worker flexibility go down if gig economy companies have to reclassify workers as employees, but the number of people ‘working for’ the company will as well. As a result, the overall availability of their service(s) will go down, and will be highly concentrated in densely populated areas where the potential for ‘fares’ are greater. In London, that is undoubtedly no big deal. However, in other areas, potential consumers will see a sharp drop in services at the current ‘market clearing’ price. Why? Well, because the supply curve will shift to the left as companies higher fewer workers and cover fewer areas effectively. In essence, prices will go up for consumers as the supply goes down, especially in lesser served areas. Imagine that, you try to help a brother out and you end up hurting others, maybe even those less fortunate than the person you were trying to help. Go figure.
But, hey. You just can’t escape Econ 101, no matter how hard certain politicians try.
Eventually, gig economy companies will likely allow workers to choose whether they want to be ‘employees’ or independent contractors. If they choose the former, the company will tell them when and where they will work, and how many fares they will have to generate. After all, the company will own their time, and, as such, it can tell them what to do. It isn’t terribly complicated.
Then, there is this one.
Imagine Oliver is an Uber employee who covers Westminster, the government area of London, and makes £10/hour (@$14), plus a portion of whatever tips he might get (usually from US tourists). The current minimum wage in the UK is £8.72 for workers aged 25+. He routinely drives passengers to and from Gatwick Airport from downtown. The fare is £56 each way, and takes about 90 minutes (including offloading and pickup) or thereabouts. As such, he generates £112 for the company over a 3-hour shift, for which it pays him £32.13, roughly 29%. What do think Oliver thinks of that? Other than thinking he should run a ‘gypsy cab’ company?
This is a real difference between someone who works for Uber and, say, someone who works for McDonald’s or some such place. The cashier at the latter could no more accurately quantify the amount of money their role generated for the company than flying to the moon. The same can be said for the person who gets stuck emptying the garbage cans, cleaning the bathrooms, and policing the parking lot, etc. But Oliver? He can pinpoint it, and, unless he is a really unique person, he will likely resent it.
In the end, I imagine a majority of Uber drivers (as a proxy for the entire gig economy) would eventually choose to be ‘independent contractors,’ as opposed to employees. To be certain, not everyone will for any number of different reasons. However, the appeal of the gig economy to a lot of workers is its flexibility. When you become someone else’s employee, you lose that. As a result, as I wrote in the beginning”: “be careful for what you wish, as you just may get it>”
Of course, all of this is assuming the economy gets back to some sense or normalcy in the not so distance future.
Take care, and have a great weekend.
John Norris
Chief Economist
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.