The misguided attack on the sharing economy

Economic inequality in the United States is growing and people are pissed off. For a while, this anger was channeled at Wall Street—and given the jaw-dropping profits and dubious economic benefits of recent financial "innovation" this seemed like an appropriate target. However, as financial reform advocates lost momentum in Washington, a new target has emerged that can be stymied locally and is not yet politically entrenched—the sharing economy. 

The "sharing economy" is most easily understood as a peer-to-peer marketplace that facilitates transactions (generally) through the web. (Image: Claudio Munoz)

Of course, neither Wall Street nor the sharing economy are driving the rise in economic inequality--the main culprit being hyper-productive firms with relatively few employees (thanks, information technology) that have taken advantage of opening markets through globalization. Still, opponents of the sharing economy argue that its marquee firms—notably, Uber and Airbnb—are destroying  middle-class jobs, driving the poor from their homes, and gutting collective bargaining. Do these arguments have any merit? 

Ironically, the technological mecca and (very) progressive home of the sharing economy's star enterprises is now seeking to destroy them. San Franciscans will vote today on Proposition F—basically, whether they (yes or no) believe Airbnb is responsible for that city's housing crisis and if yes, make it impossible for them to operate there (hint: they are not). Similarly, in a courthouse just down the road, Uber is under attack because a minority of its drivers question their independent contractor status—which if ruled unlawful, would destroy Uber's business model. While the merits of both of these arguments rest on little evidence, the holes in the case against Uber can be more easily exposed. 

The taxi industry vs. Uber

There is no question that Uber is challenging the future of the taxi industry. In New York City, the market value of a taxi medallion (the cartel mechanism that limits entry into the industry and keeps prices artificially high) has fallen from $1 million in the summer of 2014 to $690,000 in August 2015—wiping $4 billion dollars in value from the 13,771 medallions in circulation. Nationally, from 2012-14 the number of Uber partner-drivers ("partner-driver" being Uber's carefully-worded veil to signify independent contractor rather than employee) increased from near-zero to 160,000 nationally. By the first quarter of 2015, 46% of all paid car rides in major markets across the U.S. were through Uber. 

In NYC, taxi trips have been falling steeply. Uber is particularly attractive at night when passengers can request a ride without having to wait on the street. (Image: The Economist)

There are lots of reasons why consumers are ditching taxis and driving Uber's rise. It is substantially cheaper: from downtown Los Angeles to the airport is $22 in an UberX (the standard Uber car) versus $46.50 (w/o tip) in a typical taxi (spoiler: Uber drivers make up the difference through more fares).  Uber drivers are publicly rated by their passengers, properly incentivized to be clean and professional, and can be electronically-hailed to a destination of the rider's choice. Uber drivers can not discriminate against fares (which are calculated automatically without the need for cash) based on either the rider's destination (it only appears after pick-up) or racial background (they are matched through a computer algorithm). 
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​Simply put, Uber innovated to disrupt a monopolistic industry that had grown complacent in its service quality. Writing for The Atlantic, Scott Wallsten provided evidence for Uber's disruptive entrance by identifying a discontinuity in taxi complaints in Chicago: 

Assuming there were no other systematic differences in the periods before and after Uber entered the market, the drop in complaints may represent Taxi drivers being forced to improve quality in the face of competition. (Image: Scott Wallsten, The Atlantic)

This drop in taxi complaints in Chicago, which controlled for the total number of taxi rides, is evidence that Uber was competing not just on price, but substantially on service—Uber's entry forcing taxis to improve their quality (which reduced the number of complaints). Similarly, The Economist found that Uber's growth is not only a result of taking business from taxi drivers (65% of their growth), but also a result of market creation (35% of their growth)—propelling the argument that Uber is providing a service not previously accounted for in the marketplace and driving economic activity that would otherwise not be possible. 

The tale of two drivers

User's growth is not simply a result of consumer demand. Its ascent is equally a result of offering an otherwise absent economic benefit to partner-drivers. The graph below shows the meteoric rise in the number of drivers contracting with Uber: 

Uber's growth has been exponential. Its drivers earned $656.9 million in the last three months of 2014 and Uber itself is valued at ~$50 billion. (Image: Hall and Krueger, 2014)

Who are these drivers? Do they want employee-status? Are they undercutting well-paid taxi drivers? 

​That taxi drivers are falling victim to the employer-forced growth of independent contracting, and that other workers are in general, is largely a myth (there are notable exceptions). In 2009, the year Uber was founded, 88% of taxi drivers were already independent contractors. In the workforce as a whole, the share of independent contractors has remained steady over the past twenty years. Even if it had grown, it wouldn't be a harbinger of inequality (the Netherlands has had a significant rise in contingent work with no corresponding rise in inequality). 

The percentage of the workforce reporting as self-employed (analogous to independent contractor and contingent employee) has remained steady over the past 15 years. (Image: Hall and Krueger, 2014)

Many workers prefer the freedom and flexibility of contingent work. According to the Bureau of Labor Statistics, in 2005, 7.4% of workers had contingent contracts and 82% of them stated they preferred their arrangement to a traditional job. ​Of the assumed advantages of formal employment—employer-provided healthcare, unemployment insurance, and pension contributions--only one (unemployment insurance) is truly an advantage and it shouldn't be; it should be based on income, not employment status.  In regard to the other two advantages, employee salaries are adjusted downward to compensate for healthcare and pension expenditures on a dollar-for-dollar basis—these are not unpaid-for benefits. Similarly, with the implementation of the Affordable Care Act, the financial advantage of being "pooled" through an employer to purchase healthcare has, or will soon be, negated. 

In fact, Uber partner-drivers are earning more, per hour, than their taxi counterparts:

Data collection methodology is detailed here: http://bit.ly/1uyTm6z (Image: Hall and Krueger, 2015)

Uber drivers are also drawn from a cohort that is more representative of the workforce as a whole. 48.1% of Uber drivers are over the age of 40 compared to 63.8% of taxi drivers and chauffeurs--likely a result of the fact that since NYC taxi drivers began their unionization effort in 1998, it has become far more difficult for young professionals to enter the profession. For a few notable demographic variations: 13.8% of Uber drivers are female versus 8% of taxi drivers and chauffeurs, 36.9% of Uber drivers hold a college degree versus 14.9% of taxi drivers and chauffeurs, and 40.3% of Uber drivers are white versus 26.2% of taxi drivers and chauffeurs. Also noteworthy, only 8% of partner-drivers were unemployed when they began driving for Uber.

Creative destruction is not good for everyone

Like many industries before them, the taxi industry was disrupted by technological innovation. First, GPS destroyed the market value of knowing a city's geography and the best routes through it. Second, Uber's cellphone platform utilized GPS to create a seamless and safe marketplace for drivers and passengers to connect for mutual economic gain. 

Taxi drivers are protecting their own interests and some misguided campaigners are helping them along (Image: Wharton Magazine)

Taxi drivers are right to be upset that their livelihood is under-siege, but they (and their supporters) are wrong to think that Uber is an exploitive villain. It is more accurate to say, if not entirely so, that Uber is to the taxi industry what the taxi industry was to horse-drawn carriage operators. Would society as a whole be better off if we had prevented taxis from operating in cities to protect the jobs of horsemen? Or if we had destroyed sewing machines  to protect the jobs of seamstresses? 

​That doesn't mean you shouldn't be empathetic. Workers that have their jobs displaced by positive technological advancements should take advantage of the political process—to obtain funding for job retraining and skills enhancement. Pinning the ills of the country (inequality, stagnant incomes) on innovative and highly-visible targets--Uber's brash CEO does himself no favors—is counterproductive and misguided.