Uber’s shades of grey

(Featured image credit: 5chw4r7z/Flickr)

Their logo may be black and white, but our thinking about Uber should not be

Last week, an Employment Tribunal in London ruled that Uber drivers should not be treated as self-employed, but as workers, by the company. This means they would be entitled to a range of workers’ rights, including sick pay, paid holidays, being paid the ‘national living wage’ and a pension.

The reactions to this ruling reflect the existing polarized opinions on Uber. The Institute of Economic Affairs (IEA) for example, a free market think tank, has long been in favour of low-regulation ride-sharing services like Uber, and denounced the ruling on the basis that Uber is no different from other ‘sharing platforms’ like Airbnb and eBay. The GMB labour union (which backed the two claimants in the case), on the other hand, was “jubilant” upon winning the case, and commentators supporting the ruling pointed out, in a reaction to the IEA, that there is a difference between offering your sofa for the night or selling your children’s old toys, and selling your labour.

For anyone interested in the legal intricacies, reading the ruling should provide plenty of entertainment, showcasing the technical virtuosity with which the tribunal counters the arguments of the respondents. But, looking beyond the immediate victory (for the claimants) or defeat (for Uber), is the underlying logic sensible and constructive? Does it make sense, unless a set of quite strict criteria is met, to treat labour automatically and inevitably as performed by a worker, with all the rights and entitlements this entails?

Protection comes at a price

It doesn’t take a great deal of imagination to see behind this logic the assumption that businesses are intent on maximizing their profit, even if it is to the detriment of those who provide them with labour. The instinct is then to protect the weaker party against these injurious actions of the stronger party, and much labour legislation has precisely this purpose: maximum working-time directives, health and safety regulations, maternity leave etc. But these rights and entitlements do not come free.

If an employer is obliged by law to give his workers 5.6 weeks of paid leave each year, then that will be taken into account in their annual salary, in the same way that entitlement to maternity or paternity leave, the provision of a pension, or employers’ National Insurance Contributions do. Ultimately, employers are willing to pay a maximum amount for the labour they need, irrespective whether this is all paid in cash to the worker, or whether some of it is provided as an additional benefit. In addition, the fact that workers are entitled to a minimum wage and a notice period, regardless of the performance of the business, the business risk is almost entirely borne by the employer. That will carry a premium which reduces the price they are willing to pay for the labour.

An academic difference

From this perspective the nature of the relationship between Uber and its drivers is somewhat academic. We have an organization providing infrastructure and business processes (Uber calls it a platform) that connect demand for rides with drivers, and we have drivers responding to this demand. If these two can collaborate effectively, offering a good quality service at a price that is attractive to the market, then a successful partnership is possible, irrespective of the business model that is adopted.

That this is the case, is demonstrated in a very interesting paper by a group of economists, including Steven Levitt (of Freakonomics fame) and Robert Metcalfe. They worked out that UberX (the basic service) in the US produced a total consumer surplus of $6.8 billion in 2015. That is a big, but altogether meaningless figure. But look at it differently, and it becomes more telling: for each dollar spent on an UberX, the rider received an extra $1.57 in consumer surplus (i.e. over and above the value of the dollar paid).


Get in for a colossal consumer surplus! (photo: Alper Cugun/Flickr

The important question is not so much what the relationship is between Uber and its drivers, but whether each dollar (or, as the case was brought in the UK, each pound) the rider pays is shared reasonably between them. On their own, some of the considerations of the tribunal are hardly indisputable signs of an employer-worker relationship – a business hiring a freelancer or consultant might well check their CV and interview them prior to doing so, and subsequently demand that they work according to given constraints and requirements, and indeed determine the price at which the contractor’s or consultant’s labour is provided.

Yet one business model carries more costs than the other, and if Uber drivers are indeed workers, not self-employed contractors, it will become more expensive for Uber to hire them. Now it may well be that Uber’s operating margin is currently exorbitantly high, and that it can easily afford to pay its drivers a living wage, holiday pay and sick pay etc. But if that is really the problem, competition is a more suited way to ensure the drivers get a better deal than the current ruling. If, on the other hand, Uber’s profit is not large enough for it to support the extra cost following from the ruling, then the service provision will suffer, and a lot of the consumer surplus will be lost.

Relationships on the symbishness scale

The so-called ‘gig economy’ is relatively small (about 15% in the UK), but has grown steadily in the last 15 years. Like part-time work and zero-hours contracts, self-employed freelancers allow businesses to hire (and pay) people only when they are needed, and individuals only to work when they want to. Ordinary employment contracts do not offer that flexibility.

Of course these models can be abused. Some might argue that, considering the fact that such abuse happens even with workers and employees, it is bound to be worse still with the self-employed Uber drivers. Alternatively, it could be argued that precisely because it happens in conventional relationships, severely restricting self-employment is not a solution. Uber has 25,000 drivers in London alone. It would seem unlikely they all feel exploited.

Can freelancers, who by definition cannot rely on the law covering employment contracts, be protected from exploitation? To do that, it is first necessary to establish how fairly the gains of the collaboration between the business and its self-employed contractors are divided. Sam Gordon describes a mechanism and a scale for evaluating trades between businesses and customers according to who benefits to what extent. This could easily be adapted to capture the relationship between a business and its suppliers, including Uber and its drivers. Where Uber would sit on this scale would depend very much on its attitude towards its drivers, from the extremely exploitative “helping itself and hurting its drivers” to the extremely selfless “hurting itself whilst helping its drivers”. Perhaps the mere exposure of the position on the scale of a business, akin to Food Hygiene ratings would be sufficient to nudge businesses rightward on the scale, where there is an equitable sharing of the gains of the transaction.

As Jolyon Maugham says in a very insightful blogpost on the Uber case, “The Decision [of the Employment Tribunal] will not fix our malfunctioning labour market.” As he goes on to say, Uber will most likely modify its relationship with its drivers, reducing the amount of control they exercise, such that they will no longer be regarded as workers, so the apparent gain will be short-lived.


Needs some shades of grey

If a business model based on a conventional employer-worker relationship had been able to deliver the kind of service (and the kind of consumer surplus) that Uber does, it would most probably have been done. The labour market is adapting to more diverse demands, both by consumers and by the individual suppliers of labour, and that implies the emergence of new business models. Clinging to a labour model that is aimed at ‘protecting’ as many active people as possible by ensuring they are treated as workers unless a stringent set of criteria is met is not providing the flexibility that is sought not just by businesses but also by individuals. In a recent column, Tyler Cowen observes that this is an illustration of the age-old fight between progress and protection: “Progress is painful to some precisely because it is a big step forward for all the others”, referring to the huge consumer surplus.

What is needed is not enforcement of laws that apply to a time when you had to be either a worker with all the rights or self-employed with none – when things were black and white, like the colours of Uber’s logo. Instead, the need is for a nuanced body of employment law that recognizes the diversity of the demand and supply of labour and of the trade-offs that businesses and providers of labour make.

Balancing progress with protection is best done in shades of grey.

About koenfucius

Wisdom or koenfusion? Maybe the difference is not that big.
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