The case of AB5 in California is an interesting clarifying case regarding the motivations and goals of labor regulation. AB5 redefines the distinction between contractors and employees and is mostly an attempt to force Uber and Lyft to treat their drivers as employees rather than contractors. This will entitle them to benefits, workplace protections, and the minimum wage. My experience with these firms is that the contractor status is a key component of the benefits of their model, and that in most markets, changing to an employee-based model will make it difficult for them to continue.
Normally, one argument in favor of higher minimum wages is that firms have monopsony power over unskilled laborers, so they hire fewer workers and pay them less than if the market were more purely competitive. Thus, raising the minimum wage does not lead to much unemployment. Firms can afford to pay more. The minimum wage just transfers some of the monopsonist gains back to the workers.
But, the interesting thing about this particular market is that you would be hard-pressed to find a market that was a closer approximation of pure competition. On the customer side, Uber & Lyft are basically commodities. Riders can check on both services, and will generally go with the one that has the shortest wait at the lowest price. Many drivers drive for both, so there is little the firms can do to differentiate their service.
On the driver side, the firms must pay enough to entice drivers to be available. In fact, Uber and Lyft pay more than the market clearing price for drivers that have riders in their cars because in order to win more passengers, they need to pay enough to induce drivers to be available, which in this industry, inevitably means idle time.
In fact, Uber & Lyft have very little control over what their drivers earn. Since this is a competitive industry with free entry and exit, and since the firms must accept as many drivers as they can, within reason, so that they can offer customers a shorter wait time than the other firm does, drivers determine their earnings by entering or exiting the market. If Uber & Lyft pay more than is necessary, more drivers will enter the market, and they will spend more idle time without riders in their cars. This will happen even within the existing pool of drivers. If Uber decides to raise the payment they make to drivers in a market, that will induce more drivers to Uber and away from Lyft. If you ask drivers what happens in markets where one of the firms changes their pay rates, you will find that the total weekly earnings don't change much. If Uber raised their pay rates, then a driver who drives for both will find that they get more rides from Lyft because drivers will have substituted between the two firms until the net total pay (idle time plus paid time) roughly evens out.
This is a classic case of queuing. And you can see the queue adjusting in real time to changes on the ground. In fact, that is the beauty of the contractor model. There are hundreds or thousands of drivers in a city, and drivers are constantly adjusting between Lyft and Uber, between times of day or location. Each driver is in a constant chess match to find the most lucrative way of driving that matches their needs and constraints, and the key variable at the center of those tactics is minimizing idle time. Each driver is increasing or decreasing their willingness to queue depending on the opportunities available to them as drivers or outside the rideshare industry.
Compare this to the minimum wage debate. Effectively what minimum wage opponents argue is that those markets are generally competitive, so that a high minimum wage will increase unemployment. Unemployment is a queue. The minimum wage is set above the market clearing rate, so workers queue to supply the limited demand for employment.
In the minimum wage debate, monopsony is treated as a preexisting condition which the minimum wage is meant to cure. Here, there clearly is no monopsony. In fact, these firms are so lacking in market power that even the proponents of AB5 sometimes express doubt that their business model is sustainable. In reality, AB5 is meant to
create monopsony. But, queuing is already a natural part of this model. So, what AB5 would do is make Uber & Lyft gatekeepers reducing the quantity of labor supplied in the market. Since drivers would be employees, and the firms would be responsible for their total earnings from both idle and active time, the firms would have an incentive to minimize idle time. They would have an incentive to limit the number of drivers.
This would not necessarily change the total amount of queuing time. It would simply segregate it so that the riders who are now chosen by the gatekeepers to be employed would have less idle time, and the riders who are not chosen would be in the queue known as unemployment.
I think this would be tragic. The beauty of the contractor model is that workers who have been turned away by the gatekeepers in other industries that have employee models can enter this business without dealing with gatekeepers.
One aspect of this industry that would be interesting to study is that there is a great amount of variation in driver earnings. Even
this MIT study which found low earnings levels on average (which I think have been
revised up) shows a tremendous range in driver earnings.
What's interesting is that this is a completely open marketplace. There is little that drivers can do to keep other drivers from horning in on their driving strategy. There are few barriers to entry. (Even the car isn't much of a barrier. There are companies that partner with Uber and Lyft that will rent you a car for less than $5/day.)
What you find if you ask drivers about their work is that there is a tremendous amount of variety among drivers regarding what they need from their work and what strategies they use to get what they need. In the minimum wage debate, opponents often point out that employers will make non-wage adjustments to counter regulated wage gains - less flexibility, fewer benefits, etc. What we can see here is that the drivers themselves, in the unregulated rideshare market are actively engaged in some massive rebalancing between pecuniary and non-pecuniary benefits. The variance in earnings might be partly explained by skill, or location. I'm sure in Phoenix it's easier for a driver that lives in old-town Scottsdale to roll out of bed and turn the apps on and get rides immediately than it is for one on the far west side who might need to drive downtown to get to a busy area. But, surely those factors can't explain that much variation. Drivers are making choices about when they want to work, what types of riders they want to pick up, etc. The 2am bar scene is a sure-fire earnings winner, but many drivers happily sit it out.
So, from a public policy point of view, those who would regulate this market aren't trying to fix a market failure. There is no market failure. AB5 creates monopsony power by imposing a wage floor and a regulatory framework in this market, with the hope that the economic rents will be claimed by the drivers.
This is telling. I think it's a bit of a misunderstanding to think that Progressive, egalitarian political policies are intended to make up for economic rents claimed in imperfect markets. Egalitarian policies require economic rents. You can't divvy up the spoils in your preferred way if you don't have spoils.
In this particular case, engineering corporate power and then trying to transfer the gains to the workers will be a huge loss. First, I just don't think the business model can work that way. There are countless ways that drivers now manage their queuing in a way that is productive which simply couldn't be managed centrally, including being simultaneously available for both Uber & Lyft. But, furthermore, this is basically a classic labor market. This is not much different than, say commission sales work. In the same way, sales jobs frequently have highly variable earnings distribution that comes from hard-to-quantify skills. Many workers try out sales, fail miserably, and then quit. So, there are some real winners, but also high turnover, and many workers that just don't do sales well and don't make much money doing it. This market isn't much different than that. If there are some drivers who are only making $5/hour, then they shouldn't drive. Or, maybe they are retired and they just like to have an excuse to get out of the house and meet people. Creating a market that drives this vast sea of diversity out and turns it into a cookie cutter job where you go where you're told, everyone makes a similar, lowish wage, with much less flexibility for the drivers will mean that a lot of drivers will lose things they value. And, many of the drivers that are making $20/hour or more will either make a lot less or will be driven out of the market altogether because being contractors is a key element to their driving strategy.
And, this will likely fail at its own goals. The loss of productivity and the loss of a potential chance to earn income without gatekeepers making the hire/no hire decision will leave a lot of drivers out. In the current competitive rideshare market, it is other opportunities that determine what drivers earn. If similar work can get you $12/hour in other jobs, and a driver in that city can earn $13, then that worker, on the margin, will drive, adding to the queue time for all drivers as more drivers must divvy up the same number of rides, until similar drivers are only making $12 after factoring in idle time. Regulatory impositions like this do nothing to improve those other opportunities.
The rhetoric on this issue tends to be anti-corporate, as if this regulation will force the firms to treat their workers better. But, the firms are powerless to significantly increase the pay to their drivers. The regulation requires a playing field that engineers more corporate power. The idea is to use that corporate power to lessen wage inequality. It will only lessen wage inequality within the rideshare industry, and it will do so at the expense of some of the better paid drivers and at the expense of potential drivers who will now not get hired. And it will lower the value added from the rideshare industry.
AB5 is crony capitalism. It has to be. It can't do what it purports to do without creating a framework that gives the firms power to limit access to the market. As I mentioned in the
previous post, this might be a generalized point. Maybe more powerful firms are correlated with less variance in wages. The egalitarian project requires powerful firms so they can be directed by the state to distribute the gains from that power. But, trying to engineer that outcome with policies like AB5 is fraught with potential downsides. I haven't seen evidence that AB5 proponents have attempted to fully understand those downsides. It would probably be impossible to fully understand the potential downsides. In the end, driver incomes are determined by the available alternatives. This applies generally to all workers, really. It is unlikely that the fates of workers in general will improve by imposing regulations meant to take available alternatives away.
The fact that the rideshare industry is such a decent approximation of textbook competitive markets makes it a great example for understanding which complaints about our present economy are complaints about information being conveyed by functional markets about the state of the world and which complaints are about market failures. To my eye, there is a lot of confusion on this distinction.