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The Uber Economy

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Here’s the bulk of an e-mail that I received this morning from a regular reader of Cafe Hayek; I share it here with his kind permission:

I am currently enrolled in a masters in economics program at Drexel University in Philadelphia, and am a regular patron at the Café.  In order to make ends meet, I have recently started driving for Uber.  The flexibility has been perfect for my busy schedule, and I take no small amount of pride in helping to break down the government-mandated monopoly that cab companies have enjoyed over citizens for decades.  My experience in this capacity has illustrated to me several points that seem to be common themes at the Café, and I have decided to take a moment on this slow Tuesday morning to share them with you, in hopes that you might commiserate and share my frustration.

I am not sure how well-versed you are with the pay structure at Uber, but for every ride I give, I receive 80% of the fare, with Uber taking 20% as a fee.  This is an arrangement that I find to be more than fair, and I often express my gratitude for the generosity of this system to my clients.  I am routinely dumbfounded, however, by the responses I receive.  The typical customer says something along the lines of “how can they take 20%, you’re doing ALL the work?” or if you will pardon my French, “that’s standard corporate bulls**t.”

Though I am sure it is unnecessary, I feel compelled to go through a quick breakdown of the “work” involved in this product in order to test the hypothesis proffered by these clients that I do the lion’s share.  Uber has created a massive network that uses economies of scale to seamlessly match the demand for transportation with the supply of underutilized capital (idle cars).  They have created an app that allows the customer to know where I am, how long it will take me to get there, and even to watch the exact route I take.  More importantly, they have legitimized my solicitation of rides for money in several ways: 1) By giving the customer my car’s make and model, my license plate number and a picture of me in a shirt and tie, they have virtually eliminated the awkward process of making sure that I am indeed their driver.  2) Because I am required to submit to a background check in order to be approved as an Uber driver, the customer can be confident in the fact that I am not a criminal looking to use the system for some horrible means, and finally 3) By allowing every client to which I have provided service to rate me, and then by allowing potential new clients to see that rating, they have allowed me to establish a reputation for quality service that would otherwise have been impossible.

They have also used the mountain of data they have generated to set a rate that both maximizes my willingness to provide rides with the end user’s desire to pay for them, thus negating the haggling process that would have been necessary if I were soliciting rides on my own.

For my part, I pick up the customer at the location that Uber gives me and drop them off at the destination they have uploaded, often having to follow the navigation system that the app links to and starts at the touch of a button.  It is labor that could be replaced by virtually any human being with a driver’s license and a vehicle newer than 2000 (the only requirement Uber has for vehicles).  To me, it is clear that I am overpaid.  I have tried on several occasions to engage my clients on this matter and show them how little value I actually provide, but with typically little success.  I try to get them to understand how badly my venture would fail if I tried to solicit rides without the help of the app, but they (rightly) find the idea to be ridiculous and yet fail to see that if is only because of Uber that I am able to have any success.

It is due to the beauty of this newly freed market that Uber has realized that they will maximize their profits by only taking a tiny share of each ride, thus incentivizing me to provide many more rides at virtually zero marginal cost to them.  The whole system stands to me as a glowing monument to the triumph of free markets and the profit motive, and yet the average American still seems to think that I am the indispensable part of this process.

I write you now simply because I believe you will share my frustration at this overvaluation of the most common labor and the implications it will have for policy-makers in the future….

Sincerely,
Jim Flynn

Three thoughts:

First, thanks, Mr. Flynn.  Of course I largely agree with what you’ve written here.

Second, I dispute only your suggestions that (1) drivers are dispensable – that is, not critical – to Uber’s success, and (2) you are overpaid.  You are completely correct to note, and even to emphasize, that the value contributed by Uber flows from its creative use of technology to enable ordinary owners of automobiles to transform some portion of those automobiles from consumption into production goods – a transformation that benefits Uber owners, Uber drivers, and consumers.  But although you would not enjoy the income-earning opportunity that Uber opens to you were it not for Uber, Uber would not enjoy the profit-earning opportunity that you open to it were it not for you and others who drive for Uber.  One of the many beautiful features of a market economy characterized by the division of labor is that it makes each of us profitably dependent upon the rest of us without, at the same time, giving any of us the power to hold-up any others of us.  Your pay, while to you more than adequate, is not excessive if it results from the voluntary exchanges of you, Uber, and your customers.  To be generously compensated is not necessarily to be over-compensated.

Third, Uber is but one innovation that makes even more unrealistic (as if such were possible) the claim that real-world labor markets for low-skilled workers in modern America are infected with monopsony power.

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