(credit: Guercio)

From sharing to gigging

Would-be self-employed workers may underestimate the true cost of freedom

When I was a little whippersnapper, sitting in the back seat (or on a rare occasion, on the lap of an adult in the front — amazing what was OK back then!), I used to be impressed by the advertising on the side of solitary houses we passed on the way to a Sunday visit to distant relatives. Sometimes it was just painted on lettering, faded by decades of weather, praising brand names that no longer existed. The grown-ups in my life at the time referred to it as ‘getting rich while sleeping’, and that certainly spoke to my imagination.

What I only realized much later is that this was an early example of what is now called the sharing economy. The lateral wall of a house obviously has a critical function in supporting the roof and keeping the elements out. But if it is located along a busy road, it has the potential to fulfil another function. The owner of the house could choose to share the wall with someone else, and give them permission to paint or stick messages on them aimed at passing motorists, in return for some money. Maybe not quite the thing that generates a huge fortune in no time, but the income, for no significant marginal cost, will probably have been a nice little extra at the time.

From idleness, an income

Such instances of making money from unused resources were rare, though, until the internet came along. People did sell the occasional sofa or bike through the small ads or went to car boot sales, but it was eBay that enabled a much larger and more dynamic market place. Suddenly, you could trade slightly-out-of-fashion-but-still-perfectly-wearable clothes with people hundreds and thousands of miles away.

A purist might question whether eBay is truly about sharing, since ownership passes to a different person. But the term ‘sharing economy’ is generally seen as a category of peer-to-peer markets, seeking to put assets to use that would otherwise remain idle. The kind of collaborative consumption that eBay represents clearly fits in this view: rather than clogging up your house, your unused clothes, books, games, garden implements and whatnot can be transferred to someone who will use them — and you make some money out of it too!

But the unused stuff traded on eBay is arguably small beer in comparison with the most expensive purchases people make: cars and houses. Enter Uber and Airbnb. Paul Barter, a transport policy advisor in the UK, estimates that on average cars are being actively used barely 5% of the time. The fixed costs of even a cheap runabout (depreciation, insurance, and tax) quickly run to a few thousands of pounds, dollars or euros a year, and 95% of that is effectively money down the drain.

Now it is hard to see how you could get anywhere near 100% utilization of your car. Yet, imagine that you could double its use to 10%, and get paid for it, that might be quite a nice little earner. Ride-hailing platforms like Uber and Lyft made it easy for people to become occasional taxi drivers.

Airbnb does something similar for people with a spare room. A guest room, normally used maybe 10 nights a year, could now be rented out in between — even a sofa, unused during the night, could be a source of a little extra income.

The sunk cost of the sharing economy

Both the economics and the behavioural economics of the sharing economy are peculiar, though.

Part time taxi driving, letting a room to strangers, selling old stuff on eBay and even allowing advertising on the side of your house have one thing in common. They rely on the sunk cost of what you are selling. You already have the wall, the old stuff, the car and the spare room. And that means the economics are different from those in which you’d need to acquire them in order to monetize them.

Often that is not the only aspect that is considered as sunk. eBay sellers often don’t take into account the time it takes to package things up and take it to the post office; Airbnb hosts often don’t split out the wear and tear to sheets, the time it takes to tidy the room and wash the sheets and the cost of the detergent. Even occasional Uber drivers might consider that a couple of hours’ driving is a better use of their time than slouching in front of the TV, and might overlook the cost of the incremental fuel usage and wear and tear.

There is a form of mental accounting at play here: the ‘expenditure’ in time and real money is not treated in the same way that a business owner would. The fact that any income is better than no income from an idle asset may also lower the ‘willingness to accept’ — the price at which people are prepared to make it available. This makes the whole arrangement rather different from what would make sense if you were to regard it as a living.

From sharing to gigging

Nevertheless, a lot of people have taken to Uber (or one of its rivals) as their main, or even only income-generating activity. Uber is estimated to have more than 2 million drivers worldwide (of which more than half in the US). A 2016 study in the UK found that 44% of London’s Uber drivers drive for more than 30 hours per week (28% even more than 40).

But given the economics and the behavioural economics, it’s not surprising that what may be a nice little earner on the side is not necessarily suitable as a main source of income. An MIT study, “The economics of ride-hailing”, by Stephen Zoepf and colleagues last month found that the median profit of an Uber driver is $3.37/hour — with nearly three quarters earning the state minimum wage.

Uber’s Chief Economist Jonathan Hall contested the calculation and the amount itself, and in a great example of open exchange and feedback, Zoepf responded with revised figures of $8.55/hour or $10/hour (depending on the calculation method). Yet even with these figures around half the drivers have an income of well below minimum wage.

Uber is widely seen as a prominent example of the gig economy — in which people, rather than take an ordinary, 9–5, five-day-a-week job, become self-employed freelancers. But these figures cast doubt over the viability of such employment. Noah Smith, an economist and columnist at Bloomberg, looked closely at the figures and concludes that “the ride-hailing service requires a commitment to a bad business decision.” He finds support for this view in the vast staff turnover numbers (in 2017, a staggering 96% of Uber drivers stopped driving for the firm within a year).

Not the future

Perhaps it is important to take into account the difference between gigging and a steady job. Not everyone is happy with a routine job, and there are undoubtedly people for whom the ability to work when they want and as much as they want is valuable. A paper by Keith Chen, an economist at UCLA, and colleagues, models the ‘driver surplus’ (the extra income they would need to give up the flexibility to choose when, and how many hours they work), based on a sample of 200,000 UberX drivers. The authors calculate that a median driver (working for 12–15 hours per week) would require a 54% uplift to work fixed hours in a day, and a 178% increase to fix the days in the week as well. [1]

We should also not overlook that half the drivers in the revised calculations by Zoepf et al earn more than minimum wage.

Nevertheless, most people prefer a steady income, even if that means on the whole earning less than in a more volatile situation. This is what another recent study by Kristen Berman and Margaret Gorlin at Duke University’s Common Cents lab discovered. They asked 500 people to imagine they had a job with a very variable work pattern — 60 hours of work some weeks and no work others, with little notice. Would they be prepared to take a pay cut to switch to a consistent job — the same number of hours every week? Yes: participants said they were willing to give up on average $9,900 (23% of their yearly income). That was of course hypothetical, but when the same question was put to people who actually do have a variable schedule, the researchers still found a willingness to sacrifice $4,680, or 12%.

Are Uber and their ilk, as Noah Smith tweets, “profiting from the poor business skills of the average worker”? Uber is a long way from making a profit (it lost $4.5 billion in 2017). This suggests the economics don’t quite work from the ‘employer’ perspective either.

In any case, sharing economy platforms may work well for people who want to make a bit of extra money on the side, but they are not really appropriate as main employment.

And that may well be true for the gigging economy as a whole — sharing or not. People may be attracted by the prospect of being their own boss and being able to work at will. But this requires people to think and act like small business owners, aware of the true costs of the freedom of being self-employed. Many have no idea of the costs an employer carries, over and above their net wage. As Noah Smith says, most people are not good at running a business.

Uber, Deliveroo, Mechanical Turk and all the other sharing and gigging platforms are really a full-scale field experiment in discovering the future of work. It looks like those who were anticipating a future in which significant numbers opt for self-employment will not see their expectations come true.

Neither the economics nor the behavioural economics of such a future seem to withstand the test of reality.

[1] This reference was added thanks to input from Robert Metcalfe.

Originally published at koenfucius.wordpress.com on March 16, 2018.

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Accidental behavioural economist in search of wisdom. Uses insights from (behavioural) economics in organization development. On Twitter as @koenfucius