California Closes the Frontier of Technology and Commerce

From the beginning of the history of America, we the people have acted to escape hierarchy, embrace liberty, and find a new life for ourselves even at substantial risk. The Pilgrims left England where an established Anglican Church made it hard for them to practice their own creed and where guilds locked them into an economic class system.

Even after the United States was born, those uncomfortable with more staid structures of established cities and towns struck out for the West. David McCulloch has recently written a superb book, Pioneers, reminding us of how settlers of the Northwestern Territory, the site now of Midwestern states like Ohio and Illinois, were themselves the inheritors of the Pilgrim tradition in our early republic. They too sought opportunity for larger ways of living than they could find in the East and endured great hardships in doing so. The journey farther west is more familiar from films and novels, but the appeal of the open frontier has always been similar. California was as far in the continental United States as one could go, and it is no accident that it became the state most famous for realizing the American dream in story and film.

Technological innovation has also proved a handmaiden of America’s fluid commercial liberty. Machinery first allowed most to escape the back breaking work of the farm, and automation the tedious work of the assembly line. Today technology is creating new opportunities to strike out independently, including working in the gig economy. What is remarkable about these jobs is how they offer the freedom to work to pursue modern dreams. Because of the flexibility of driving with the aid of the Uber app, delivering food with the Grubhub app, or being matched for a household job by Thumbtack, these technological frontiersmen and women can still pursue an education, an entertainment career, or take care of sick relatives as they choose. They can also use otherwise fallow capital to earn money as Uber and Lyft drivers use their own cars to pick up passengers just as our forbears put virgin soil to productive use. And it is no surprise that most of these companies got their start in California, which for much of our history has been the state where the frontier spirit best combined with the genius of innovation.

And just as the gig economy gives people flexible ways of making money, it also breaks down the hierarchy in sectors like transportation. Previously, the only way people could be sure of a car driver at the ready was to have a chauffeur or schedule a ride with a car service in advance, radio-dispatched taxis being notoriously unreliable. Now even in unfamiliar cities, everyone with a smartphone has a car at their beck and call at prices no higher than that of a taxi.

Unfortunately, California’s just passed law threatens to reintroduce a state structure of employment hierarchy by requiring gig workers to be employees of large companies rather than independent contractors who can easily work for many different people. It imperils the flexibility that serves both those who provide services and those who receive them in the gig economy. While I believe that the result of this law for the gig economy is less clear than most people think (for reasons discussed below), the law certainly does not advance this new economy and the flexibility it brings. The California legislature failed to pass an alternative that would have clearly protected the gig economy’s flexible business model.

If the law in fact forces service providers to become employees rather than independent contractors, the rigidities of an employment structure will have very large costs to both providers and consumers. First, the costs to Uber and similar companies will become much higher because they will have to pay for a minimum wage, sick leave, and other benefits imposed by law. But even with such benefits, their drivers will not necessarily become better off even assuming they can retain work at all. After all, current gig workers have chosen their trade rather than become an employee even in an economy where companies are desperate to hire employees given the historically low rate of unemployment. Economists have in fact quantified the extra value workers gain from this flexibility in the gig economy.  A job would have to pay up to 40 per cent more, if gig workers had had nine to five employment with a firm rather than the looser relationship afforded by the gig economy.  And as someone who has frequently used ridesharing apps, I can say that the vast majority of drivers tout the flexibility they enjoy.

And gig workers will lose a lot of flexibility by being forced to be employees. Given the higher costs, Uber and other similar companies will force them to work very clearly demarcated hours when they will earn the most amount of money. Otherwise their freedom of choice would allow them to choose times they could idle and yet collect a paycheck. While gig workers today shift between using different apps depending on the payoff, they will almost certainly lose the freedom to work for competing companies because one gig company will fear that other companies will lure them to make the most lucrative rides.

And consumers will suffer as well. Decentralized decision making by drivers as independent contractors helps meet demand. In fact, a recent paper shows that if ridesharing drivers become employees and so no longer can use both Uber and Lyft, consumer welfare will be lower with higher prices and higher wait times. A hierarchy in transportation services will reappear along with the imposed structure of employment.

Ultimately the California courts will decide how to interpret the law. One requirement for being an independent contractor under the law is that the app company must not be in the same business as the company that pays the service provider. Uber is thus arguing that it is not in the transportation business but instead in the software and matching business. Another requirement is that “the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.”  Companies like Uber and Grubhub can argue that service providers are in an independent business of transportation of people or food. The workers make important choices for themselves such as where and when to drive, what app to use, and what kind of car to deploy.

But even if courts rule in favor of these tech companies, the attitudes expressed in the California legislature suggest that the law might well be revised to force an employment relation on the gig economy. It is true that the legislature exempted many traditional economic actors, like real estate and insurance agents, from being forced into an employment relation they did not choose. But the political problem for the gig economy is that it threatens a host of established actors, like taxi companies and trade unions in sectors like plumbing. It thus is much more likely to be the target of legislators seeking to protect established and well-heeled interest groups from competition.

The failure to extend similar exemptions to workers in the gig economy demonstrates that California does not value the technological frontier and the liberty it brings. It is no longer a state for dreaming of new possibilities, but of protecting old orders, more like the England from which the Pilgrims escaped than the America which they helped found.