Occam's Razor

I took my first Lyft ride the other day. I am pleased to say that the technology worked great! I picked up my luggage at baggage claim at Bradley International near Hartford, opened my Lyft app and within two minutes a driver was flagging me down and I was on my way home. I arrived home forty-five minutes later and just $55 poorer, but compared with taking a taxi I doubtlessly saved a bundle. In addition, my driver turned out to work part time for United Technologies configuring cloud services on Microsoft Azure for their customers. So we had lots to chat about and the drive went quickly. He fills his free hours driving people mostly to and from the airport and seemed happy to be a Lyft driver.

Until recently my daughter depended on Lyft and Uber to get around. She gave up her car a few years ago, convinced she didn’t need one in Washington’s far suburbs. If she needed to go somewhere, she’d either walk or use one of these services. Nonetheless, she snapped up the free car I offered her: my old 2005 Honda Civic Hybrid (now replaced by a Toyota Prius Prime). That was my reason for flying: I drove the car to Virginia to give it to her and took a United Airlines flight back. While normally my wife would pick me up at the airport, she recently had a knee replacement and couldn’t do it. So I experimented with Lyft, which I heard was the less evil of the two services. More to the point, it didn’t look like taking a taxi at Bradley was an option anymore. I didn’t see any I could flag down in Arrivals.

So it was a great experience until I thought about the model of Lyft and Uber in general. A lot of their drivers have too and have figured out that they are being exploited. Lyft and Uber are hardly alone using this model. In our new gig economy, the trick seems to be to create companies that find unique ways to exploit workers by making them not realize they are being exploited. In the case of Lyft and Uber, the first thing to do it not to label them employees. They are “independent contractors” who set their own hours and get paid fixed rates. One advantage to being a Lyft or Uber driver compared with being a Supershuttle driver is that they don’t have to rent a van from the company and probably aren’t working sixteen hours a day to keep paying Supershuttle’s franchise and leasing fees.

But they are getting ripped off. In the case of Lyft, they recently reduced payments to their “independent contractors”, which did not make them happy but did probably help lessen Lyft’s losses. Lyft went IPO last week but it’s bleeding money. Nonetheless, they aren’t too worried. Amazon used this strategy very profitably until their competition was either destroyed or bought out. Lyft is hoping for the same sort of success at this game. Its new shareholders don’t seem convinced yet as you can buy Lyft shares well below the $72/share price set at their launch.

These new companies exploit shamelessly and fight dirty. Customers tend to look the other way, basically because they don’t understand what’s going on. If you can save 30% or more with a Lyft ride compared to taking a taxi, you see a good deal plus in many cases they are faster and more convenient than a taxi. It’s clear to me though that these savings come principally from these “independent contractors”.

Taxi drivers are often independent contractors too. They usually aren’t employees. But they are regulated. Taxi commissions typically oversee these services and set rates that allow taxi drivers to earn a decent wage. In some cases they own their taxi, in some cases the taxi company owns them. But it’s a model that’s been working quite well because cities and towns have decided to make it work for both drivers and passengers.

Uber and Lyft decided to be disruptive, which was to just ignore these taxi commissions and brand their services as something other than what it is: a taxi service. The big difference is that their cars aren’t painted with the taxi company’s colors. You hop into one of these cars and hope that your driver won’t drive sexually assault you.

Doing background investigations on “independent contractors” of course raises costs. Hopefully both Lyft and Uber are at least doing cursory background investigations before offering contracts to these “independent contractors”. It’s more convenient to ignore these issues until it becomes too big a problem, and then hope to manage them.

But the real ones being exploited are not customers, but drivers. Basically they become drivers to get some quick cash to pay a few bills. What’s harder to see is the costs on their vehicles and how it eventually affects their bottom line. A car that was driven 10,000 miles a year that is now driven 30,000 miles a year will wear out more quickly and require more frequent maintenance. Neither Lyft nor Uber will pay for these expenses. You are supposed to figure that out as part of your business model, along with other things like withholding money for taxes and social security and Medicare, including the employer’s share. All these expenses plus the quick depreciation and higher maintenance costs on your car means that for most drivers, your effective wage per hour is below the minimum wage and you get all the hassles and costs of maintaining your car and paying taxes too.

These companies are prominent examples of this trend but they are hardly alone. Employers basically don’t want to employ: it’s costly, limits their ability to move quickly to market conditions and requires a lot of hassle. Amazon reluctantly raised wages for its warehouse workers to $15/hour, but it still hires lots of “independent contractors” who work for much less. Even my driver’s erstwhile day employer, United Technologies, is trying him out at part time wages and substandard benefits. He works from home and has to wait two more months before he is allowed to actually come into the office.

I don’t think this gig economy is sustainable. It endures until these “independent contractors” say enough and demand a fairer deal, which is hard to do if you have no union hall. Hopefully they will get a decent deal, but that will raises costs overall and make their whole business model less profitable.

But maybe it won’t matter. Like Amazon they hope that they will have gotten rid of the competition by then by hanging on as long as possible. This success though depends on cutting competition off at the kneecaps and exploiting people as long as possible. In the case of Lyft and Uber, so far it’s been decimating taxi companies. If ultimately it doesn’t work, they go out of business, leaving of course their “independent contractors” hanging.

In the case of Uber and Lyft, it’s clear this will happen eventually anyhow. The plan is to introduce fleets of automated cars as soon as the technology matures. And these “independent contractors” will be left holding the bag with cars with high mileage, lots of costs and no job.