By Bill Conerly
Uber and Lyft have grown thanks to a number of innovations, including surge pricing and flexible schedules. California is now legislating that these “gig workers” be classified as employees, raising the question of whether the ride hailing business model will survive.
Surge pricing is illustrated by a trip to San Francisco that my wife and I took. We walked for about two miles. We were ready to turn around and head back to our rental apartment when it started raining. We hailed an Uber and waited under an awning. The driver told us that he worked from home, but kept the Uber app open on his desk. When the rain started, surge pricing raised what he could earn from driving. He set aside his other work and got in his car. This practice has two lovely benefits. First, more cars are available for consumers when they want them the most. Second, the driver works when pay is handsome, not when pay is low.
The flexibility of Uber and Lyft goes beyond surge pricing, though. When we tested the car services from our home in Portland’s outer suburbs, we wondered if anyone would pick us up. We got a very prompt ride to the airport from a person who works from home, with the Uber app open on his desk. He live a few miles away from us, and only accepts drives that begin near him, so he does not have to spend too much time getting to the start of a job. This enables him to earn good money when he can, without wasting his time when there is little work to do.
The even cooler story was another ride to the airport. Our driver had been visiting his mother in a hospital not far from our home, and then headed to his own house just beyond the airport. His Uber app showed that he could diverge a bit from his intended path and get a paying customer. That’s perfect for the driver, perfect for us passengers, and reduces total fuel use in the economy as well.
Can this flexibility work with drivers as employees? To some extent yes, but not entirely. The companies already know when peak driving times occur, city by city. They can schedule employees to fill those times.
They will have to pay minimum wage plus some mandated benefits, so the ride services will not be a way to avoid the minimum wage law. Currently some drivers earn less than the minimum hourly wage, but continue because they are trying to earn more total money. For example, earnings are likely to be just $5 per hour during a certain time period, but the driver may believe that is better than sitting home doing nothing.
The minimum wage requirement, especially in cities and states where it is relatively high, will reduce the number of cars available on short notice, which will lengthen wait times for consumers. It won’t sink the business model, but will shrink the revenue base somewhat.
The surge pricing concept is likely to survive through a couple of mechanisms. First, as noted above, the companies will schedule employees to meet anticipated demand.
Surprises still happen, such as rain. For this challenge, work offerings may be the solution. For example, suppose that some rain is forecasted, but the timing is uncertain. The companies can inform drivers that there may be work opportunities on short notice, and to sign in if they are interested. Then when the rain actually starts, those available on short notice can be put on the clock as needed.
The opportunistic worker, such as the work-at-home person who lives near me, can register as available on short notice. When I use my app to get a ride, the company will contact the nearby person who is not currently working and ask if the person is interested in starting work in the next five minutes.
These work-arounds will preserve the ride-hailing business model. Some states have worker scheduling laws that may interfere, but generally the companies can adjust their practices. Some loss of efficiency is likely, so consumers should expect slightly higher prices and slightly worse service. Business profits will probably suffer a little, as well.
This analysis is not meant to be a defense of the California employment law. It’s stupid to prevent people from the kind of work that they want and to limit consumers mobility. But like many bad ideas, this is more an irritation than a death knell to the industry.