The Bear’s Lair: The Uberized economy is death to quality

Last week’s Economist magazine had a leading article and lengthy feature “The future of work” looking at the Silicon Valley companies such as Uber and Airbnb that, by creating the “on-demand economy,” have turned employees into freelancers. Their emergence has like most innovations been opposed by entrenched interests, with both Uber and Airbnb facing legal opposition in city after city. Yet in this case the entrenched interests may be winners in the long run. Not only are the new Uberized freelancers mostly woefully underpaid and without benefits, but the Uberizers’ removal of structure from services’ provision deprives service users of valuable information and will lead to rock-bottom quality.

The Economist is generally positive about the new Uberized economy, but makes the point that it works better for the young and fancy-free or for the newly retired seeking extra part-time income than it does for mid-career types needing to raise a family, pay for healthcare and build retirement savings. It also makes the point that the casualization of large portions of the workforce will undoubtedly impose massive additional costs on the dwindling group of regular taxpayers, since they will be forced to pay for the casual workers’ missing healthcare and retirement provisions.

This highlights the first big problem with Uberization: the lack of bargaining power of freelance suppliers in an Uberized system. We have already seen this problem with Uber itself, and with its lower-cost extension Uber-X. Initially, the service seemed purely a product of Silicon Valley ingenuity; through clever software it was able to draw on reserve capacity in limousine services and among ordinary citizen-drivers, while charging about the same as taxis or a little more (with surge pricing in times of high demand) and paying its drivers decently. However, as the service ceased to be a novelty and began to expand market share in several big cities, it cut its prices to gain business while also cutting the payments to its contractors, who found themselves earning considerably less than anticipated.

By making labor more casual, Uberization reduces its bargaining power compared to that of the service organizer. The Economist rejects the analogy with the Victorian dock worker, hired day by day from the clamoring pool of applicants, but in practice this is where the system is going. The protections in a less casual system, whereby workers could get together and form strong unions, arrange licensing requirements that formed barriers to entry, or use political power to install the New York Taxi Commission, are no longer there. Instead, the organizer of the service is enabled to use the cheapest possible source of labor, driving its remuneration down towards the minimum wage, if there is one applicable to the service concerned (it is not clear how a minimum wage is applied to taxi services in which the contractor provides the vehicle and pays its costs, for example.)

Silicon Valley’s enthusiasm for unrestricted immigration and legalization of every low-skill stray, together with numerous sloppy “guest worker” programs driving wages down further is thus explained. By this means market forces operating against their casual workforce can be maximized, since the protections against their immiseration have been removed by the new labor system. This would reverse the process by which in 1914 Henry Ford decided to pay his assembly-line workers $5 a day, so that with saving they would be able to afford to buy his Model T cars. The Economist article quoted the case of a Handy cleaner living in a homeless shelter; for the less specialized services this will become a common occurrence, since with infinite mass-immigrant competition few of them will be able to afford anywhere else in places as expensive as New York.

To be fair, the complete immiseration of the workforce is likely only in services with no licensing requirements or substantial training needs, for which mass immigration can provide an ever-working downward ratchet on wages. For accountants and lawyers, also subject to new Uberization operations, the downward pressure is less great, because those groups have sensibly organized stringent licensing requirements to be allowed to practice in the United States. Indeed, the lawyers’ licensing requirements are so stringent as to require degrees from U.S. law schools as well as passing the local state bar examinations. Thus we should not feel sorry for lawyers; their ability through Congress and state legislatures to pass endless redundant and nitpicking legislation requiring ever more use of their services is unparalleled. At a lower level, state requirements for training hairdressers and beauticians suggest that in those fields too producer lobbies have erected at least modest barriers against Uberization.

Nevertheless, even for these more specialized services, Uberization has an additional, irredeemable problem: that of quality. If remuneration is driven down to the lowest possible level and there is no long-term relationship between supplier and recipient, then there is also no incentive for quality control on the part of the service provider. This doesn’t matter too much for taxi services, although users of Uber-X may find an increasing share of clapped out jalopies and non-English speaking drivers in the product mix. However for services such as accounting and legal provision, in most cases the quality of the service matters very much indeed. With the Uberized economy there is no incentive for service providers to undertake the training and skill enhancement needed to improve it beyond the bare minimum.

The quality control problem also exists for low-skill services in which the service is used repeatedly. Handymen and cleaners, for example, are often of very poor quality if picked at random, and an Uberized system which uses denizens of homeless shelters on a regular basis will provide services that are not only of poor quality but also involve the service user in considerable risk of theft or other abuses.

In these cases, the best service comes from providers who are recommended by other users or known personally to the service user, and have an ongoing relationship with the user. In that way, the capabilities of the service provider and the special requirements of the service user will both over time become known to the other, and the level of satisfaction will thereby exponentially increase. By definition however, these primarily local, small-scale arrangements, which are of course difficult to achieve in areas such as Manhattan or Fairfax County where high real estate costs cause the number of service users to swamp the number of service providers, are impossible through an Uberized service.

This illustrates a third problem with Uberization: information. The local cleaner or handyman and their customers have a great deal of information about each other’s needs and capabilities, which is blocked by Uberization. This problem also exists for Airbnb, which is attempting to replace the big hotel chains as providers of lodging services. When a customer books with a Marriott or a Days’ Inn, he has through the brand’s reputation considerable information about the accommodation and services that will be provided, and need only negotiate about cost. Conversely, large hotel chains, being impersonal, can employ security staff to deal with any difficult or dishonest customers, of which there will inevitably be a modest percentage.

On both sides, corporate service provision provides assurances that an Uberized system cannot match. Economies of scale need not be in manufacturing or marketing, they can simply rest in the information that a large-scale service provider’s brand reputation gives to its customers, which a freelance system can never provide. Moreover, operating through a large corporation generally provides the best means by which a service provider can get paid a premium for providing better quality; he need only prove himself to the large corporation, rather than to the multitude of customers one by one, while his customers can rest assured that the large corporation’s quality control procedures guarantee a high-quality service.

This works even in the most complex services, such as journalism. Only the most gifted writers can establish an individual brand name that will make their output read by their target audience worldwide, however it is marketed. For most writers, attaching themselves to a large well-respected outlet such as the Wall Street Journal or the Economist is the best way to ensure that they will be read, and will be paid more than the bare minimum for their output. Similarly, lawyers at Slaughter and May, or accountants at Pricewaterhouse Coopers, can deal with the largest and most interesting problems, provide the best service, and get paid accordingly.

As this column has frequently emphasized, there are diseconomies of scale as well as economies; large organizations acquire stupidity through their size, and can hinder the provision of top quality services rather than helping it. Moreover, in service provision and in a world of Internet-enabled communication many of the mechanical economies of scale that made Henry Ford’s manufacturing operation so hyper-competitive do not apply.

Thus in an ideal world, organizations like the old London merchant banks, of moderate size but formidable reputations acquired over several centuries, would be the ideal providers of the most complex services at the highest level. But Uberized service providers, in which there are no real assurances of quality, no adequate provision of information about the service, and every incentive to skimp on service provision, are in most cases not the answer. Once the initial glamour of their Silicon Valley origins has worn off, and the initial cheap billions of venture capital money have been spent, this will become clear.

Millennials who read the Economist’s excellent piece, or ponder the realities of their working future, may reasonably worry whether their life is to be one of penury, working inordinately long hours with little job satisfaction and no job security to provide a standard low-quality service to innumerable faceless but demanding customers. They need not worry. Except for a few niche groups of services and customers, such as hipsters who don’t like chain hotels, the Uberized service model does not work very well. Once the current funny-money-fueled surge of money into these applications has died down, they will mostly wither away or confine themselves to modest corners of the market.


(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)