Sharing Economy: Big Shifts, Big Problems

The Sharing Economy is broad in scope: it includes companies like AirBnB, Uber, and TaskRabbit, all of which are subtly different. Someone renting out their apartment on AirBnB is essentially trading temporary access to their property for money. Someone driving an Uber is trading temporary access to their property (their car) and labor (driving) for money. A person running a few errands on TaskRabbit is purely trading their labor for money. In this article, we will focus on the part of the sharing economy that allows people to trade their labor for money, and the problems it presents.

Currently, in the vast majority of cases, a person that uses the sharing economy to make money is not an employee, but an independent contractor. That's the point, at least in theory: to let people with spare time make a bit of supplemental income by giving a stranger a ride, or by running a small errand. A company like Uber or Handy purports to be simply a service that connects clients with contractors, with as little paperwork and as few strings attached as possible.

This wouldn't give rise to any concerns if contractors used the sharing economy only for supplemental income. But of course that is not the case: most of the Uber- or Lyft-drivers you meet drive full-time. There is a pronounced trend of traditional service jobs gradually moving into the domain of the sharing economy.

This trend is certain for a simple pricing reason: service providers from the sharing economy can massively undercut traditional service providers because independent contractors are not required to receive the minimum wage. For example, take a traditional cleaning company: they have to pay all their employees at least the minimum wage, which sets a limit on how low they can make the prices they charge, while still turning a profit. Now take a sharing economy-based cleaning “company”: they don't have any wages to pay their cleaners. They make a profit by taking a cut of what their contractors make. The contractor sets their own wage (or may be required by the company to set a particular wage), and wanting to find work, will necessarily set their wage so as to undercut the prices of their competition (note that competition may hail from both the traditional and the sharing economy). This has two likely outcomes:

  1. The contractor may earn a wage (consistently) below the federal minimum, since many of these jobs were priced at or near the minimum wage to begin with.
  2. The traditional service provider may be outcompeted by sharing economy-based service providers.

The conclusion of all this is simple: a substantial share of the participants in the labor economy will transition into being independent contractors full-time, as the traditional companies that would otherwise have employed them will not be able to compete as effectively. It is to be expected that wages for such contractors would be lower than they are now, whereby many of these workers will be earning below the minimum wage. However, as the market moves toward the new equilibrium wage, more people should be able to find work. That is important, and it is a fundamental part of the reason why the mainstream economic opinion is that the minimum wage is not economically helpful, and that we might be better off without it. Moreover, given the complex and large-scale impacts of this shift in wage distribution, it is not immediately clear (to me) whether this shift in wages is, overall, a good or a bad thing.

What's much more concerning is the fact that the independent contractors of the sharing economy will not have the protection and benefits that employees have. Over the years, employees have accrued domain-specific protections, insurance, retirement plans, trade unions, automatic handling of certain tax obligations, etc. Being an employee — even a minimally paid one — endows a laborer with a number of valuable privileges, ranging from personal benefits to political/institutional bargaining power. Independent contractors, by and large, don't get these. This is one of the big problems with the shift into the sharing economy: the people who most need employment benefits and legal protection from exploitation stand to lose both.

The other big problem is that there is no fast and clear solution to that problem. Historically, we have created not only legal distinctions between different types of employment, but also norms and expectations around them, which play into the nature of these legal distinctions. Now that these norms and expectations are being subverted and there's a new ‘type’ of independent contractor (i.e. the sharing economy's quasi-employee) that is technically hard to distinguish from traditional independent contractors, it's not obvious at all how to how to endow the contractors of the sharing economy with the protections and benefits they need without also equivalently endowing traditional independent contractors and upsetting the balance of incentives between employee- and contractor-status.

Some courts have made legal decisions that turn the quasi-employee into an actual employee. However, it seems unlikely that courts will have the time to examine every single business in the sharing economy and to pass judgment on the status of their workers. Beyond that, for such legislation to be truly impactful, it needs to be in effect across the entire United States, which will probably take many years even for a single company, not to mention any type of blanket decision.

In conclusion: the rise of the sharing economy already has, and will continue to replace traditional employee-positions with contractor-positions in the service economy. This will almost certainly lead to a circumvention of the minimum wage, which will marginally lower unemployment. Those who were previously unemployed but find work in the sharing economy will probably be marginally better off. However, those who were previously employed and are forced to transition into contractor-positions because traditionally-employing firms are outcompeted at a price level will be worse off: they can be expected to lose significantly from their hourly wage, and they will lose valuable employment protections and benefits.

It is unclear how to ensure that the quality-of-life for the previously employed group does not slip significantly: the speed of the judicial process is slow, and it is not obvious how to divide the sharing economy's quasi-employees from regular independent contractors, so the quasi-employees can be awarded the protection and benefits they deserve. Beyond that, even if such protections and benefits were awarded, it's not clear how they could be awarded without the cost of them implicitly coming out of the paycheck of the contractor: if the costs of these benefits and protections are forced on the contracting entity, then this may further lower the wages of the contractors — so should independent contractors also have a minimum wage? Should the government pay for contractor benefits and protections? Whatever the solution, it will be controversial.

But it is not even certain whether a ‘solution’ is necessary! It is not clear at all whether securing benefits and protections for the contractors of the sharing economy will be, in aggregate, socially and economically beneficial. To me, it certainly feels right to try to secure benefits and protections for these contractors — socioeconomic inequality is a serious issue, and I believe that the floor on the standard of living should be significantly raised[0] — but admittedly, it is hard to predict the indirect effects of legislative action to that effect. There are many examples of legislation enacted to improve the standard of living that ended up lowering it via unforeseen consequences.

It's a tough nut to crack, especially because it's difficult to gauge the number and types of jobs that will move into the sharing economy, and the speed with which this will happen. Thus, armed with little reliable data, it's hard to predict resulting situations and solve the problems outlined above. The only real certainty is that the move will have far-reaching socioeconomic impacts. It is difficult to forecast how these impacts will be manifest, and consequently, to decide how to prepare for these impacts.

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[0] I hold this opinion regardless of the ongoing debate about the point at which socioeconomic inequality impedes economic growth.

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