Why Uber's business model is doomed
Having threatened to pull out of California completely, Uber and Lyft recently won a temporary reprieve from orders to reclassify their drivers as employees rather than independent contractors. The companies argued they could not come up with a plan for doing so overnight, even though more than two years have passed since California’s supreme court ordered them to change their ways. The Californian labour law AB5 was supposed to end their noncompliance.
One might assume that misclassifying drivers as independent contractors enables rideshare companies such as Uber to make exorbitant profits. The reality is far weirder. In fact, Uber and Lyft are not making any profits at all. On the contrary, the companies have been haemorrhaging cash for years, undercharging users for rides in a bid to aggressively expand their market shares worldwide. Squeezing drivers’ salaries is not their main strategy for becoming profitable. Doing so merely slows the speed at which they burn through money.
The truth is that Uber and Lyft exist largely as the embodiments of
Wall Street-funded bets on automation, which have failed to come to fruition. These companies are trying to survive legal challenges to their illegal hiring practices, while waiting for driverless-car technologies to improve. The advent of the autonomous car would allow Uber and Lyft to fire their drivers. Having already acquired a position of dominance with the rideshare market, these companies would then reap major monopoly profits. There is simply no world in which paying drivers a living wage would become part of Uber and Lyft’s long-term business plans.
Only in a world where more profitable opportunities for investment are sorely lacking can such wild bets on far-flung futuristic technologies become massive multinational companies. Corporations and wealthy individuals have accumulated huge sums of money and cannot figure out where to put it because returns on investments are extremely low. The flip side of falling rates of business investment is a slackening pace of economic growth, which economists have termed “secular stagnation.” It’s this decadeslong slowdown that has generated the insecure labour force on which Uber and Lyft rely.
In slow-growing economies, labour markets are weak. Older workers who lose their jobs have trouble finding equivalent forms of employment. Meanwhile, young people just starting out in their working lives are sending out hundreds of applications only to end up in dead-end retail jobs. Rideshare companies such as Uber and Lyft feed off the insecurity that is omnipresent in the modern economy. When the alternative is working irregular shifts at coffee shops, driving for rideshare companies on one’s own schedule can seem like a dream. Management by algorithm appears similarly utopian compared with management by nasty bosses. In the early years of their operation, rideshare companies even offered rates of pay that were good relative to available alternatives.
Of course, Uber and Lyft were probably planning to have fired these workers by now and to have replaced them with robots. But like many promises of automation, driverless cars are still some way from becoming a reality.
Uber and Lyft started squeezing these workers’ incomes to staunch their own bleeding of cash reserves. At this point, drivers started fighting back.
This fight for workers’ rights is grounded in a growing recognition that the expansion of the digital economy does not simply reflect the triumph of an unstoppable technological change. Behind Silicon Valley rhetoric, much of what appears to be technological innovation turns out to be a means of circumventing legal regulations, including minimum wage laws. By misclassifying its workers, Uber avoided paying hundreds of millions of dollars into US state unemployment insurance schemes. Yet during the Covid-19 economic crisis, Uber lobbied the federal government to step in and pay its drivers’ unemployment benefits anyway.
Why should Uber be entitled to have it both ways? It makes sense to demand that companies hire workers in stable jobs, or not be allowed to hire them in the first place. Yet in an environment of weak economic growth, this demand will be insufficient to win economic security for all. Capitalist economies have been able to extend security to widening circles of workers only in periods of rapid economic growth, when low rates of unemployment made it possible for more and more workers to demand better wages and working conditions. The era of high-speed economic growth ended long ago and is not coming back.
High rates of economic growth in the mid-20th century – the reference point for any politics that seeks to restore economic growth in the present – were premised on a historically exceptional period. The restoration of stable international trade following two world wars made possible the largest growth of economic productive capacity in human history, not just in Europe and the United States, but worldwide. By the 1970s, rapid expansion had given way to worsening global overcapacity, resulting in rising competition and falling rates of investment in internationally traded goods. People were left scrambling for work in the growing service sector, where the potential for labour productivity growth, and hence economic growth, is significantly lower.
Workers’ inability to find stable employment is thus not the result of recent advances in automation technologies, which, like driverless cars, have mostly failed to pan out. Their plight results from an everyday reality of low profitability in economies saturated with capital, and insufficient opportunities for its reinvestment, such that dividends and share buybacks have increasingly become the norm for surplus cash holdings. With shrinking opportunities for investment, enormous pools of capital have rushed into highly speculative ventures such as Uber and Lyft that have little capacity for demonstrated profitability.
That governments turned a blind eye to Uber and Lyft’s misbehaviour for so long is no surprise. Governments
are complicit in making workers more vulnerable. Facing persistently slow economic growth and high rates of unemployment, governments have spent decades trying to coax companies to invest by making it easier to deny workers’ benefits and to avoid paying taxes. Again, this bid to restore conditions of rapid economic growth, much like supply-side and trickle-down solutions that failed to produce generalised prosperity, was a failure. The Covid crisis has only made economic prospects less auspicious.
People need security that is not tied to their job. The pandemic has revealed this imperative more than ever before. In a world that is as wealthy as ours, and given the technologies we have already produced – even without the realisation of the dreams of automation – everyone should have access to food, energy, housing and healthcare. If people had that security, why would they choose to work in terrible jobs where they are paid low wages? The owners of Uber and Lyft know that their business is predicated on a world in which they get to make the key decisions that shape our futures, without our input. The world of work is going to have to be democratised. They are just delaying what should be inevitable.
• Aaron Benanav is a researcher at Humboldt University of Berlin. His first book, Automation and the Future of Work, will be published by Verso in November