Source: San Francisco Chronicle

After months of intense political deliberation, lobbying, injunctions, and media attention, California Governor Gavin Newsom finally signed California Assembly Bill 5 (AB5) into law in September 2019, with the bill going into effect on January 1, 2020. The new bill may have significant implications for the gig economy at large, and particularly, for electronically mediated work platforms such as Uber and Lyft. AB5 requires companies to reclassify independent contractors as employees — helping them enjoy job stability and decent wages — and codifies the ruling of Dynamex Operations West, Inc. v. Superior Court of Los Angeles into California law. Under the bill’s “ABC” test, Uber drivers can only remain independent contractors if the business is able to prove that these workers are free from the control and direction of  the company and are not doing work that is central to Uber’s business. Under this bill, Uber will thus be forced to reclassify its drivers as employees, meaning that drivers will be entitled to unemployment insurance, workers’ compensation, overtime, employee benefits, and social security. They will also gain the right to unionize and engage in collective bargaining. Uber and Lyft have warned that the bill could potentially destroy their businesses, pledging a combined $60 million to fund a ballot initiative to exempt them from the law. Over the past few weeks, the heated legal battle between online gig platforms and the California legislature has once again made national headlines with Uber and Lyft threatening to suspend its operations in California, only to gain reprieve from a California appellate judge who blocked the state from forcing Uber and Lyft to reclassify their drivers as employees. For now, rideshare companies remain in California. The latest battle in this saga will be determined at the ballot this November where California voters will vote on Proposition 22, to determine whether app-based drivers are to be considered employees or contractors. This piece will seek to evaluate the possible economic effects of AB5 if Uber, Lyft, and other rideshare online platforms are forced to comply, and will discuss its implications for consumers, drivers, and other stakeholders.  

Measuring the Gig Economy

There is significant variation within the current literature across key definitions and measurements of the gig economy. The Bureau of Labor Statistics (BLS) conducts the Contingent Worker Supplement (CWS) survey monthly  to collect information from households about the kind of work that household members perform. Notably, the BLS CWS does not have a formal definition of what is included in the gig economy. Gig work is generally understood as “income-earning activities outside of traditional, long-term employer-employee” relationships, marked instead by temporary arrangements, scheduling flexibility, and “lack of direct oversight.” Between 2005 and 2017, the survey data indicates that the number of workers in alternative arrangements fell slightly from 10.7 percent of employed workers to 10.1 percent of employed workers . However, the BLS survey may underestimate the true number of electronically mediated workers because the questions about contingent and alternative work arrangements are asked only about a person’s main job. The Federal Reserve (Fed) also fields its own online survey of 11,316 respondents, designed to assess the number of independent workers in the economy. They define gig work to include both online and offline activities, defined as informal, infrequent paid activities such as service activities or renting. The Fed survey found that in 2018, 3 in 10 adults engaged in at least one of the gig activities listed, with 15 percent engaging specifically in a service activity. The Fed survey is also a comparatively better estimator of the true proportion of Americans involved in gig work because it asks about informal work done outside one’s main job, distinguishing it from the BLS. The BLS report, the Fed report, and other official measurements such as IRS tax filings paint contrasting pictures on the growth and trajectory of the gig economy. Ultimately, there is still much debate surrounding how to officially measure the true size of alternative work arrangements and the gig economy in general.

Measuring the Online Platform Economy

Within the study of the gig economy, new research has been developed to study the size of the online platform gig economy specifically, in order to capture the extent of individuals working as contractors for companies like Uber, Lyft, or Handy. The online gig economy is defined by the use of an Internet-based app to match customers to workers. The BLS CWS survey reported that 1.0 percent of workers used online apps to arrange work. Using an alternative methodology, Harris and Krueger (2015) reviewed 26 intermediaries in the online gig economy and used Google Trends to track the relative frequency of searches for the name of a particular intermediary. Using the scale of Uber to estimate the size of the gig economy, and assuming that the number of workers using an intermediary is proportional to the number of Google searches for the company, Harris and Krueger (2015) estimate that 0.4 percent of total US employment —600,000 workers — are engaged in the online gig economy, with two-thirds of these workers using Uber.

The JPMorgan Chase Institute has also offered novel ways of measuring the size of the online gig economy. Utilizing Chase’s internal checking account data of over 260,000 sampled individuals who had provided goods or services over three years on one of 30 intermediary platforms, researchers at the Institute found that 1.6 percent of families using Chase checking accounts had received income from an online platform at the start of 2018. Distinguishing between platform types within the online gig economy, they found that 1.0 percent of families received income from the transportation sector, with transportation now comprising 56 percent of the online gig economy, eclipsing non-transport work by total participants and transaction volume. By looking at checking account flows that directly show payments to a driver linked to an online intermediary account, JPMorgan Chase data can be considered more reliable or better at estimating the number of workers in the online gig economy than comparable data. That said, the existence of other payment methods such as the online platforms’ exclusive payment arrangements — notably Uber’s “Instant Pay” — may cause the Chase data to understate the true share of households with online income to some extent. In conclusion, while the literature includes a wide array of different data and measurement tools, the research points to an online platform economy that is still quite small, with only around 1.0 percent of the labor force or less actively involved in the gig economy.

Who Is the Uber Driver?

Uber has grown exponentially since it first launched in 2010. The majority of Uber drivers use Uber as a secondary, part-time activity in order to supplement income, and value the flexibility to set their own hours. Utilizing Uber’s proprietary administrative data, Hall and Krueger observed driving history, schedules, and earnings of its drivers, and conducted a survey of 632 drivers in 2015. They found that most of those driving with Uber have a full-time job (52 percent) as opposed to a part-time job (14 percent), and only 33 percent had no job. Prior to driving for Uber, only 8 percent of drivers in 2014 and 10 percent in 2015 came from nonemployment, being incentivized by income exceeding the reservation wage and flexibility to begin driving for Uber. With respect to the proportion of drivers with health benefits, drivers are considered independent contractors by Uber and are thus not eligible for employer-provided health insurance, minimum wage, workers’ compensation, or other benefits. The BLS CWS found that independent contractors are less likely to have health insurance than traditional employees. A study of Uber drivers finds that “38 percent of Uber’s driver-partners received employer provided health care” from either their primary job or from spouse or another family member’s employer.” With respect to future growth implications of Uber, many believe that growth of freelance transportation work is plateauing; people are not quitting their day jobs to work for Uber. Data points to depressing wages for participants as new entrants have increased the supply of drivers, and while driving remains an important way for financially vulnerable families to smooth income volatility, very high turnover remains among drivers, as participants only drive when they need to. Indeed, one study concludes that “more than half of participants drop out within 12 months.”

Uber and the Transportation Sector

The introduction of Uber into the transportation sector has had sizable effects on the traditional taxi industry, consumer welfare, and labor supply of drivers. Using a triple difference-in-difference model, Berger et al. (2018) looked at the systematic impact of Uber before and after its introduction in 50 of the largest metropolitan areas in the United States, and uses American Community Survey samples to estimate its disruption effect on employment and earnings of taxi drivers. The results find that after Uber’s introduction, taxi drivers faced a relative earnings decline of 10 percent. Uber —  employing independent contractors —  offers a cheaper alternative to taxis, “depressing the demand for conventional taxi rides,” and effectively acting  as a “low-cost substitute” for taxis, with all other transportation unaffected. That said, while Uber’s entry lowered earnings of taxi drivers, it had no statistically significant effect on the labor supply of taxis nor its composition. In line with this, Cohen et al. (2016) measured consumers’ willingness to pay at any given level of “surge pricing” and found that consumer surplus has increased with  the introduction of Uber, generating an estimated $2.9 billion in consumer surplus across four major cities. The research subsequently finds that the consumer surplus from the introduction of Uber has outweighed the relative losses experienced by taxi drivers.

Policy Implications of California AB5 for Uber

California AB5 can have a wide array of effects on the labor market for Uber, as well as for other sectors which rely on a large volume of independent contractors. First, by making Uber drivers employees, they will lose their flexibility to choose and customize their work schedule to fit their needs. Chen et al. (2019) used driver data to compare the variation in drivers’ reservation wages – the wage needed to make them take a ride – across different hours to determine how much drivers value flexibility. They find Uber drivers “require almost twice as much pay to accept the inflexibility of the taxi schedule,” and that if required to work inflexibly at the prevailing wages, that “they would reduce hours supplied by more than two-thirds.” Depending on the specific configuration of convex preferences of workers for wages and flexibility, by limiting flexibility, the proposed policy could reduce the utility of a majority of current Uber drivers, thus making drivers worse off.

The effect of AB5 requiring Uber to pay workers’ benefits and payroll taxes may also have an effect on labor demand. Economic theory would predict that an increase in the cost of labor in the form of minimum wage and benefits will result in higher prices for consumers and decreased demand for labor. The higher prices, in turn, will decrease consumer surplus as rides become more expensive, on average. The policy could be thought to have a similar impact on the labor market as that of a “payroll tax.” By mandating that drivers be reclassified as employees, the marginal cost of labor will increase in the form of employee benefits and compensation. While on the surface this is a positive for drivers, the cost of this may be borne by employees in the form of lower wages and reduced levels of employment. In addition, as labor supply is generally more inelastic than labor demand due to asymmetry in bargaining power, it is likely that the majority of the burden of the taxes will fall on the drivers Accordingly, requiring employers like Uber or Lyft to provide certain benefits or pay for payroll taxes would mean that the gains to employment for workers will ultimately be offset in the form of lower net fees collected by workers. The increase in cost of labor has had demonstrable negative impacts in California after the passage of AB5 for independent contractors in construction, local theater, trucking, freelance journalism, musicians, photographers, and other industries with low-bargaining power workers who were unable to seek exemption from the law, which triggered widespread layoffs as a result.

The policy will also have important effects within the context of health benefits and compensating differentials. As stated previously, 38 percent of drivers already receive employer healthcare, and a majority use Uber as a secondary source of income. Given the range of compensation packages between wages and health benefits, workers who already have health insurance through their spouse or primary job would not benefit from the healthcare package, and would seek to choose a job that offers a “consumption bundle” with higher wages and no health insurance, essentially “trading” benefits for more cash. The policy in question, however, would have an important social benefit in that it will increase the number of people covered by health insurance. When a large proportion of people are uncovered and need urgent medical care, the cost of care is passed on to the state and may lead to rising health insurance premiums. Rather than making the state subsidize driver health care, AB5 would make Uber internalize this cost.

Closing Remarks

Ultimately, deriving the policy’s effect on drivers depends on deriving the individual’s utility function for flexibility, wages, and healthcare benefits. For workers with primary jobs who mainly use Uber as a gig to smooth against income volatility, they value flexibility very highly, and so AB5 could actually reduce their utility and willingness to drive at prevailing wages. More financially vulnerable workers without health insurance, however, stand to benefit considerably from gaining employee status. In an era in which the collective bargaining power of workers has shrunk and union participation rates have fallen precipitously, California AB5 has become an impassioned battle for workers’ rights, fought by some of the most financially vulnerable segments of the population. Proposition 22, if passed, would mean drivers remain as independent contractors, but receive a minimum level of pay and healthcare subsidies depending on how much they drive. Only time will tell to see if this can be mutually beneficial to both gig workers and those that need the most support.