Why the Gig Economy Doesn’t Work

2019 has been a big year for tech IPOs, but it’s been a huge year for gig economy IPOs. Uber (NYSE:UBER), Lyft (NASDAQ:LYFT), RealReal (NASDAQ:REAL) and Fiverr (NYSE:FVRR) have already gone public and are companies capitalizing on — or helping to shape the gig economy. Still upcoming, we have Airbnb and Postmates. And even the embroiled WeWork is in some way reliant on the rise of a more transient, less traditional workforce.

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So what does this all mean? It’s hard to say because very few people can agree on what the “gig economy” or “gig work” means.

Does it mean anyone who works for an app? Does that include people who are freelancers finding work through platforms like Fiverr and Upwork (NASDAQ:UPWK)? What about contractors who work for a single company but are not officially employees?

Who Is a Gig Worker?

The Federal Reserve broadly says that “gig work covers personal service activities, such as child care, house cleaning, or ride-sharing, as well as goods-related activities, such as selling goods online or renting out property.” This definition of gig work includes both online and offline activities, underscoring the fact that most of these activities predate the internet.

By this very wide definition, the Fed found that 3 in 10 adults engaged in at least one gig activity in the month before the 2018 survey. However, this number goes as high as 37% for people ages 18-29 and as low as 21% for people over 60. 18% of gig workers said that it was their primary income.

The Fed also found that gig workers are more likely to be financially fragile. Of people who use gig work as their primary source of income, 58% are considered financially fragile. That is, they would have difficulty handling an unexpected $400 expense or are using alternative financial services. 44% of those using gig work to supplement their income were financially fragile.

The Bureau of Labor Statistics, which puts out the jobs report that many use to measure the health of the U.S. economy has no formal definition of a gig worker or way of tracking them. This is because the BLS tracks primary work only. So people who work a number of different gigs or who need gig work to supplement their income are excluded. The closest it has is the Contingent Worker Supplement. Contingent workers are workers who do not expect their jobs to last longer than a year. The survey, last put out in May 2017, also identified workers with “alternative work arrangements.”

It found that:

“In May 2017, there were 10.6 million independent contractors (6.9 percent of total employment), 2.6 million on-call workers (1.7 percent of total employment), 1.4 million temporary help agency workers (0.9 percent of total employment), and 933,000 workers provided by contract firms (0.6 percent of total employment).”

It’s unclear how these numbers have changed over time. Prior to 2017, the Contingent Worker Supplement had not been released since 2005. Good thing there was nothing that fundamentally disrupted U.S. employment between 2005 and 2017, right?

But How Many Gig Workers Are There, Really?

But in 2017, for the first time, the BLS asked 4 questions about “electronically-mediated employment,” or “short jobs or tasks that workers find through mobile apps that both connect them with customers and arrange payment for the tasks.”

The survey found that there 1.6 million electronically mediated workers in the U.S., accounting for 1% of total employment. The BLS attempted to distinguish whether these jobs were a person’s main job, second job or additional work for pay. Unfortunately, the BLS believes there were errors in interpretation of this question. As such, it does not recommend using this data.

A study conducted by the Freelancers Union and Upwork concluded that 57 million Americans freelance, but only 6%-7% of those surveyed described themselves as “gig workers.”

So what is the gig economy?

Well, no one has decided yet. And while some companies may spin that as new and exciting, it makes it hard to track these workers. It is even harder to see if they’re being exploited. It’s also much harder to know if gig work is a stable source of labor that will work going forward.

In 2017, McKinsey estimated that 68 million workers were currently in the gig economy, and that 20 million were only doing it because they couldn’t find better pay or a better job elsewhere.

But it’s fine, right? Unemployment has gone down since 2017 and wages have gone up. But remember, that’s according to the BLS, the department that doesn’t know how to define gig workers or determine how many people were doing electronically mediated work as a primary job.

The truth is we don’t know how large this group of workers is, or if they will be a reliable work force — or customer — for all of these gig-economy dependent companies going forward.

The Face of the Gig Economy

For an example of the sustainability of the gig economy, let’s look at the face of it: Uber drivers. Since its IPO, Uber has hit a number of speed bumps. Two of these bumps are relevant to this discussion:

  1. California Assembly Bill 5
  2. Profitability

First is California Assembly Bill 5. This bill makes it harder for companies like Uber (and Lyft and others) to continue to classify their drivers as contractors instead of employees. This means drivers would need to earn minimum wage and receive benefits. Employers also have to pay taxes on employees that they don’t need to pay for contractors.

Both Uber and Lyft plan to fight this law, with Uber claiming that “drivers aren’t core to its business.” This argument obviously makes no sense. Being able to open Uber and request a ride doesn’t exactly work if no one is ever going to come pick you up. That doesn’t mean Uber can’t win this legal battle, but it’s unlikely that this is the last attempt to regulate the gig economy.

Can Uber Turn a Profit?

All this leads into the next question. How will Uber ever turn a profit?

Last quarter, Uber took in gross bookings of $15.8 billion, but most of that money went directly to drivers, and Uber’s revenues were only $3.2 billion. That’s about 20%.

Overall, the company lost $5.2 billion dollars in the second quarter. The company needs to be keeping more of its gross bookings, but the California bill, and the ones sure to follow, will mandate it keeps less. Uber is not profitable with it’s workers classified as contractors, so how would it be profitable otherwise?

Uber is trying to branch out with the recent release of Uber Works, an app dedicated to matching temporary workers with shifts. It has partnered with staffing agencies to do this, and the temps would be employees of the staffing agency — not Uber. This is a transparent attempt to sidestep the issues brought up in AB 5.

This move also attempts to frame Uber as the technology “that connects people to work opportunities, rather than carrying the burden of being an employer.”

Will this work? That’s unclear. But it’s unlikely to work well enough to make up for a $5-billion-a-quarter loss while the company also sidesteps further legislation.

But the other huge risk for the gig economy is not profitability, it’s that workers are unlikely to stay in it for longer than they can help it.

The Cost of Being a Gig Worker

Now that we’ve talked about how the gig economy might not continue to work for companies, let’s look at how it’s already failing employees.

Back in 2014, Uber stated in a blog post that the median annual income for an UberX driver in New York City is $90,766. In response, Slate writer Alison Griswold attempted to find one person making that much money as an Uber driver. She couldn’t. (Note: I have not been able to locate the original blog post, but other contemporaneous reporting verifies Uber made the same claim).

If $90,000 is the median, that means Uber claimed 50% of its drivers in New York City made more than $90,000 a year.

A salary of $90,766 works out to about $43.63 an hour if a driver is working 40 hours a week. In an also deleted tweet, Uber claimed around the same time New York City drivers made about $25 an hour after taxes and fees.

A driver would have to commit to a  70-hour week to hit the yearly median that Uber originally published.

Minimum Wage

One driver interviewed for the Slate article made about $12 an hour after paying for gas, car cleanings, insurance, parking and maintenance costs. For someone employed by a company as a driver, all of these expenses would be covered.

The minimum wage for employers with more than 11 employees in New York City is currently $15 an hour.

A survey conducted by Ridester showed that in 2018, New York City Uber drivers were making about $20.92 an hour before expenses. But the person interviewed for the Slate article was making $21 an hour before fees brought it down to $12. That was five years ago. Costs have only increased since then. In the Ridester’s worst-rated city — Akron, Ohio — drivers are only averaging $4.94 an hour before expenses.

Yes, expenses are lower in Akron than New York, but $4.94 is well below federal minimum wag. Can these drivers break even?

Low pay isn’t just a problem for those who receive it. Many currently believe the world economy is currently being held up by the American consumer, but what happens if the American consumer has less and less to spend?

How can Lyft and Uber rely on having a consistent workforce when the pay is so abysmal? Many workers will leave as soon as they find something better. And if drivers aren’t breaking even, they’re not going to even bother waiting for something better. They’re just going to jump ship.

The Human Cost of the Gig Economy

But low pay isn’t the only cost of being a gig worker.

Gig workers are far less likely to have health insurance. While about 85% of Americans have some form of health insurance, only 67% of temporary workers and 75% of independent contractors do. And when people are uninsured, it hurts the economy and raises prices for people with insurance.

Most people access retirement plans through their employers. This means gig economy workers have bleak prospects when it comes to saving for the future. And when people can’t take care of themselves in retirement, that weighs on the overall economy as well.

But for some gig economy workers, especially drivers, health insurance and retirement plans are the furthest thing from their mind. They’re focused on keeping a roof on their head or, in some cases, just surviving.

Bhairavi Desai, the executive director of the New York Taxi Workers Alliance, (which also represents Uber and Lyft drivers) told Fast Company:

“We’re talking about massive bankruptcies, foreclosures, evictions. We’ve had Uber and Lyft members … end up in homeless shelters for six months at a time, to drivers talking about food scarcity, to people living in their cars and sleeping at the airports overnight. We saw such high levels of depression and despair, and eventually we started to see the suicides.”

Since 2018, nine ride-hailing and cab drivers have taken their own lives in New York alone. All communications from the Taxi Workers’ unions to its members now include the suicide hotline.

The Bottom Line on the Gig Economy

According to Edison Research, 45% of gig workers say they feel stuck in their current financial situation. They report higher levels of financial instability than their traditionally employed counterparts.

African-American and Hispanic workers are more likely to be relying on the gig economy for their primary income.

The gig economy isn’t profitable for companies. But moreover, the harm that it does to its workers is incalculable — literally, since the government can’t seem to count these workers.

And it’s giving us an incomplete picture of the economy.

158 million people were employed as of the September jobs report. Almost 6 million were unemployed (and looking for work) making for a very low rate of 3.5%. Just over 1 million workers were part-time because could only find part-time work but wanted full-time work. On their own, those are great numbers.

But what about the 20 million people mentioned earlier? The ones who were in the gig economy only because they had to be? That group is almost four times as large as the total unemployed. It is 20 times larger than the jobs report underemployed number. And the BLS is not consistently tracking them. So they won’t be in the jobs report, and we won’t know how well the economy is really doing.

But the real losers are the workers, who are being exploited by promises of being their own boss and setting their own hours.

As of this writing, Regina Borsellino held no positions in the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/why-the-gig-economy-doesnt-work/.

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