Uber and Lyft don't cover their cost of capital and rely on desperate workers

Uber and Lyft are only economically viable because they offload their cost of capital -- the investment and depreciation on cars and the cost of keeping a driver fed and healthy -- onto the drivers, who are only willing to accept such a bad deal because the labor market sucks.

Businesses that can't cover their costs of capital are not sustainable without some source of subsidy (like the food-stamps for McDonald's and Walmart workers that we all pay for). If the labor market improves and workers decline to continue to subsidize rideshare companies they'll need to find some way to get the government or the capital markets to subsidize them or they'll collapse.

The market will not miraculously produce a capital replacing living wage. If it does so in any particular market it is happenstance; luck, not social physics.

This is a social action problem; a race to the bottom issue. It makes sense, individually, to race to the bottom. Company execs and investors get rich, consumers get cheaper rides and drivers get money they need. But this isn’t win, win, win. It is win, win, lose over the not very long run.

The cheaper wages paid to drivers, and thus the cheaper rides, also drive business with capital structures which make social sense out of business. They can’t compete with “drive your car into the ground, make less than minimum wage”.

The Market Fairy will not solve the problems of Uber and Lyft [Ian Welsh]

(Image: Uber Sidecar Lyft, Colin@TheTruthAbout, CC-BY-SA)

(via Naked Capitalism)

Notable Replies

  1. Scrub says:

    I recently talked to an Uber driver about this very thing. He confirmed that is a real issue.

  2. And there is the real crux of the "sharing economy." Driving for Uber isn't the sharing economy, it's a part-time job that requires the use of your car. The only "sharing" that's going on is Uber is sharing your capital and getting a cut.

  3. That's the enticing myth. That may work for a room you're not using, but it doesn't work for a car. The operating costs and depreciation on a car is highly dependent upon how many miles you put on it. Driving the car for the sole purpose of picking up passengers is not the sharing economy - it's not something that you're going to be doing anyway. It's a part-time job that requires the use of your car, just like pizza delivery. It's the pizza delivery economy, a economic step backwards, not forwards.

  4. Actually, just to elaborate a little more on the FedEx example here...

    With these FedEx jobs, in practice someone takes out a bank loan to buy their job contract and the working capital (truck etc). The working capital, unlike an Uber car, has a bunch of corporate logos on it and doesn't have much resale value. Plus they nickel-and-dime you for the insurance.

    The job contract of course is revokable by the company, in which case it has no resale value.

    So in practice, people can't quit their job unless they can find someone in the secondary market to pay off their bank loans. Otherwise they're in hock to the bankers in addition to being unemployed. They also have a major incentive not to tell anyone if they're unhappy since that would hurt the secondary market in jobs.

    Basically, what I'm saying is that Uber is child's play at evil. The established corporate players figured this stuff out decades ago, and have basically gone so far as to securetize these jobs and sell them in a market.

    Come on Uber! Up your game already! You'll never get to cat-stroking-villain level at this rate!

  5. Old says:

    Technically, barbershops give a cut.

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