Rigidity and Flexibility: Unions in the On-Demand Economy?

by Liya Palagashvili

A couple months ago, a judge ruled in favor of Seattle’s ordinance that will allow ridesharing drivers to engage in collective bargaining agreements. The ordinance has granted the labor union, Teamsters, the right to represent drivers for companies such as Uber and Lyft. Under current U.S. labor laws, the National Labor Relations Board (NLRA) gives employees the right to unionize, but ridesharing drivers are legally classified as independent contractors, and thus outside of the purview of this legislation. The U.S. Chamber of Commerce has initiated litigation to challenge the validity of this ordinance on several grounds (e.g., preemption by NLRA, antitrust violations), though while in the appeals process, the city has begun to move forward to implement this first-in-the-nation law.

This news has ignited further debate in the old-age question of whether more unionization is “needed” in various sectors of the economy today. But I’m more interested in understanding—what would this type of unionization mean for the ride-sharing drivers, and more broadly, for all gig workers and the on-demand companies that follow a similar business model to Uber and Lyft (i.e. TaskRabbit, Handy, Upwork)?

While there are certainly benefits from the standpoint of the unionized worker, the entirety of the union system rests on imposing rigid structures in labor markets. Union rules include such things as guaranteed employment, barriers to entering the industry, onerous procedures for removing unproductive workers, and minimum or maximum requirements on hours worked.

The problem is that this type of labor rigidity is antithetical to the labor flexibility in the on-demand gig economy. On-demand companies require ease of entry and exit, diverse labor arrangements, and flexibility of on-and-off work—they are by their nature flexible, and provide a competitive alternative to traditional 9-to-5 work. In other words, by its very definition, the on-demand economy requires labor supply flexibility. And by its very nature, union rules hinder this flexibility of labor.

The need for flexible labor supply in the on-demand economy is best illustrated by its price system. The most unique feature of on-demand business models is that the companies generally utilize an algorithm that matches supply and demand. In order to do this, companies require a flexible labor supply because when demand is high, they need quantity supplied to instantaneously increase to meet the greater demand. In markets and in the algorithm of the business models, this is done through the price system. When demand is high, the algorithm generates a higher price per unit to incentivize an increase in the quantity supplied of the good. This strategy is called “dynamic pricing.”

Take Uber for example. Within the algorithm, there is a built-in incentive structure that increases the pay to drivers (i.e. surge pricing) to encourage drivers to provide rides when that service is needed most, and this instantaneous supply-demand matching requires a flexible labor model (along with a nonstandard wage and compensation structure). That is the core of Uber’s business model, and it is functionally different to say a competitor business outside of the on-demand space. Take taxicabs as an example, and assume they even use an app (as they do in NYC). Cab drivers with an app are still functionally different because they drive around during a given period of time in a given location and wait for an app or dispatcher to connect them.

In fact, this difference is precisely why Judd Cramer and Alan Krueger find that the capacity utilization rate—measured by the fraction of time a driver has a fare-paying passenger in the car while he or she is working, and by the share of total miles that drivers log in which a passenger is in their car—is significantly higher for Uber drivers than for taxi drivers. They explain that “UberX drivers spend a significantly higher fraction of their time, and drive a substantially higher share of miles, with a passenger in their car than do taxi drivers” and conclude that Uber drivers are able to do so this because Uber’s flexible labor model and surge pricing more closely match supply with demand throughout the day.

In a paper studying how drivers respond to surge pricing, M. Keith Chen and Michael Sheldon conclude that: “Uber partners both drive at times with higher demand for rides, and dynamically extend their sessions when surge pricing raises earnings.” Uber drivers respond to the surge pricing because their smartphone interface allows them to know current prices and session statistics like cumulative earnings, time, and trips. In another paper, Jonathan Hall and Chris Nosko provide an investigation of the impact of Uber’s dynamic pricing strategy. They find that when demand increases, dynamic pricing allows for quantity-supplied to meet the demand, and when they model a hypothetical case with no surge pricing, this matching effect no longer holds. Hall and Nosko go on to discuss the resulting inefficiencies in a world with no surge pricing.

Competitor companies such as Lyft and Juno also include this feature. Companies outside of ride-sharing, take Handy, for example, also have a “peak pricing” algorithm that incentivizes more Handy cleaners to supply their services at popular times.

So what do unions mean in this on-demand world? Likely, weakening the on-demand features of this new economy. This is because the on-demand economy is predicated on having a flexible labor supply that adjusts to real-time demand. Such adjustment is not possible where union collective bargaining agreements restrict wage changes, hiring and firing, maximum and minimum hours worked, layoffs, promotions, etc.

Additionally, it’s important to note that key reason workers participate in the on-demand economy is to set their own schedules and to move away from the traditional labor arrangements, evidencing that, at least some, rigidity is opposed to their interests. I discuss some of that evidence in this paper where I analyze employee vs. contractor laws and also rely on the above studies regarding the flexibility of labor supply in on-demand companies.

Some of the ideas here are also discussed in a co-authored (with Seth Oranburg), forthcoming chapter in the book “The Cambridge Handbook of U.S. Law: Reviving American Labor for a 21^st Century Economy.” In addition to the flexibility and rigidity of labor markets discussed above, we also analyze the traditional economic justification for unions (typically, in monopsonies markets); the conditions that can lead to monopsonistic power; whether the on-demand economy meets those conditions; an analysis of the impact of unions specifically on gig economy workers; and how various collective-bargaining rules regarding strikes that often strength the position of the unions are actually weakened in the gig economy world, given the presence of low-cost replacement labor, anonymity of non-strikers, and a host of other factors.