A Blog by Jonathan Low

 

May 6, 2019

In A Tight Job Market, the Gig Is Up

First, the gig economy companies were hoping that a desperate labor force would provide them with a limitless, cheap alternative to actual employees.

Now that a full economy is providing good, full time jobs, the companies are hoping autonomous technology will bail them out. At some point, investors and policy makers will begin to ask when these enterprises will present business models that reflect the reality of everything not always going their way. You know, like real businesses. JL



Christopher Mims reports in the Wall Street Journal:

“I asked, ‘Have you guys ever considered you may burn through the entire available labor market of people interested in or willing to do roles like this?’ and they did not have an answer for that.” The unusually high rate of turnover in the gig economy should have the leaders of these companies and their investors worried. Now that we have a tight labor market, and the venture-capital firms that flooded the market with cash are looking for the exits, the factors that allowed these companies to grow so large no longer exist.“These businesses are banking that driverless technologies will get (them) out of this endless cycle of losing money.”
Jason Noorzai has worked for eight different “gig economy” startups and services since 2015: Postmates, Doordash, Grubhub , GRUB -0.96% Amazon Flex, Uber, Lyft, Field Agent and Deliv.
“What I liked the most about these jobs is that they have a really flexible schedule and most of the ones I worked at pay good if you really commit to the time it takes,” says Mr. Noorzai. Uber Eats was the worst, he adds, because it offered the lowest pay and fewest tips.
He continues to moonlight for Postmates and Field Agent, but finally landed a full-time job through a staffing agency, inspecting Volkswagen and Audi vehicles that were recalled as part of the “Dieselgate” scandal.
Mr. Noorzai’s experience in the gig economy is—according to surveys by Gallup and others—typical in two ways: First, he churned through these jobs quickly, never staying in one for more than a few months. Second, he’s now using these services to supplement his income, rather than treating them as full-time work.

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The Great Recession threw people out of work and left them open to trying new things, such as picking up temporary, low-commitment contract work through an app. People working in these roles are legally not employees, and while that theoretically adds to their flexibility in how and when they do these tasks, it also means they don’t get traditional benefits and must pay their own payroll taxes.
Initially at least, venture capitalists were willing to throw record amounts of cash at companies putting a “gig” twist on the old contractor approach to hiring people. Companies such as Uber used the cash to subsidize growth at all costs, paying more out than they took in.
A decade after the founding of Uber, these companies find themselves in a very different position with respect to both the willingness of their investors to tolerate losses, and the availability of workers. In a season of IPOs, the biggest of these companies find themselves between the rock of ongoing losses and the hard place of a tight labor market, with U.S. unemployment at its lowest level in 50 years. Lyft has gone public, Uber and Postmates have filed for IPOs, and Instacart’s CEO recently affirmed one is on the horizon.
The unusually high rate of turnover in the gig economy should have the leaders of these companies and their investors worried, says Micah Rowland, chief executive of Fountain, a company that helps gig companies acquire new workers by streamlining the hiring process.
Because Fountain helps companies hire a higher proportion of the people who show an interest in working for them in the first place, Mr. Rowland’s company benefits from high turnover in the gig economy, but only as long as its clients stay in business. For some, he worries the churn rate is so high that it’s unsustainable.
‘Have you guys ever considered you may burn through the entire available labor market of people interested in or willing to do roles like this?’
—Micah Rowland, CEO of Fountain, a company that helps gig companies acquire new workers
“It struck me that in some of these markets, they’re processing thousands of job applicants every month, and these are not large cities,” says Mr. Rowland. “I asked, ‘Have you guys ever considered you may burn through the entire available labor market of people interested in or willing to do roles like this?’ and they did not have an answer for that.”
In its IPO prospectus, Uber doesn’t address the problem of attrition among drivers, but it does note that annualized attrition was near peak levels in the third quarter of 2018.
Turnover is typically high in service-sector jobs. In the fast-food industry in the U.S., for instance, turnover in 2017 was as high as 150% per year. At the end of any given year, a store with a staff of 10 would have gone through 15 employees. However, at some of the companies Fountain works with, turnover could be as high as 500% per year, speculates Mr. Rowland.
While millions of Americans are trying their hand at working for companies like Uber and Instacart, it’s not clear how many are sticking around or how much these still-unprofitable companies have to spend to keep them interested.
Adam Price is chief logistics officer at Waitr, a food-delivery company that has taken steps to slow the churn. Unlike gig startups, Waitr hires drivers as full-time workers to minimize turnover and cut back on the cost of bringing new people in. Each individual ride or food delivery doesn’t make a lot of money for the companies that handle them, so it’s important that other costs don’t add up, Mr. Price says. “You can end up in an upside-down situation where you never pay back their onboarding costs,” he adds.
You would think that companies like Uber and Lyft would respond to high turnover rates by improving conditions for workers and raising pay, but the pressures of going public appear to be pushing them in the opposite direction. For years drivers have protested pay and working conditions at these companies, and recent protests in Los Angeles, San Francisco and other cities continue to be about these issues.
Gilbert Aquino started driving for Lyft in 2013, and was one of the first drivers on the platform. He recently quit, possibly for good, he says, blaming pay erosion. “When I started it was almost $2.50 per mile. Now in L.A. I think it’s about 80 cents, and here in Minnesota it’s 70 cents.”
“We’re always listening to the driver community about how we can improve their experience, and recently introduced Lyft Driver Services to reduce drivers’ expenses and maximize their time,” says a Lyft spokeswoman.
Uber is in a quiet period now on account of its pending IPO, but the company just expanded to 30 U.S. metros its incentives program for its highest-performing drivers, called “Uber Pro.” It offers higher per-mile rates and free online college courses in partnership with Arizona State University.
In their IPOs, both Lyft and Uber set aside shares and cash bonuses for their longest-serving drivers.
Gig companies were very much a product of the 2008 economic crash, says Sarah Kessler, author of “Gigged,” which chronicles the everyday struggles of workers in the new economy. Now that we have a tight labor market, and the venture-capital firms that initially flooded the market with cash are looking for the exits, the factors that allowed these companies to quickly grow so large no longer exist, she adds.
Many of these companies have failed—when it collapsed, cleaning startup Homejoy cited the difficulty of retaining workers. Others face shareholders who expect them to turn a profit. Many analysts have said these companies will have to raise prices in order to become profitable, but it’s also possible the need to pay their workers more in order to retain them could be an additional spur to charge consumers more.
Even raising prices might just be a delaying tactic, says Mr. Price. The largest of the gig startups still have billions of dollars in the bank. For them, reaching profitability might be impossible without automating the jobs now filled by costly humans. If that sounds familiar, it’s what former Uber Chief Executive Travis Kalanick once said about self-driving cars—that being in the vanguard in developing them was an existential issue for the company.
“These [food-delivery and ride-hailing] businesses are banking that driverless technologies will be available soon enough that they can get out of this endless cycle of losing money,” says Mr. Price.
Of course, there’s always the possibility that a financial crisis and a corresponding spike in unemployment will once again make driving for Uber look as good as it was in 2009, but who would want that?

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