Should drivers for app-based delivery services such as DoorDash and UberEats receive sick pay? Will such a policy raise prices and decrease demand? And, perhaps less obviously but more importantly, does mandating sick pay for such individuals change the way we define work and economic exchange?
Thanks to the Seattle City Council, we may soon have answers to these questions.
In March 2023, the Council passed an ordinance guaranteeing sick pay and “paid safe time” to drivers who work for “on-demand network companies.” While Washington State already mandated sick pay for Uber and Lyft drivers, Seattle extended this provision to those folks who deliver groceries and take-out meals. The new rule requires a “network company” to provide their app-based delivery drivers one day of sick/safe time pay for every 30 days worked.
The extension of this policy seems obvious if one finds sick pay for Uber drivers acceptable. After all, what is the difference between shuttling Ms. Hedda Lettis to the airport or delivering a head of lettuce to your home? Nothing really, other than the actual thing transported.
But is guaranteeing sick pay to “gig workers” (as they are sometimes called) a good policy that will benefit delivery drivers and their customers?
At one level, this policy is a nice thing to do as people get sick and it would be wonderful for them to receive some income when they are not working. This was the ostensible reason the city council drafted the ordinance, noting that the lack of sick pay for DoorDash drivers has a significant impact on immigrants and people of color. Political economists, however, know that well-intentioned policies often have harmful unintended consequences, not only for the subjects the policy hopes to help, but for consumers and the broader economy as well. One of the biggest, and most neglected, consequences of this policy is that it further allows government to coercively determine the terms of voluntary exchange thus undermining free enterprise in the long run.
Understanding these issues requires us to examine the nature of “gig” work and how various forms of labor are compensated. Once we do this, the dangerous implications of politicians redefining the nature of economic exchange will become clear.
In Tomorrow 3.0, Michael Munger argues that we are on the precipice of a new economic revolution, one that significantly reduces transaction costs and promises a world of greater prosperity. Sometimes referred to as “the sharing economy,” this revolution is the result of computer and internet technology allowing people to find valuable uses for unused resources.
The logic is straightforward. Various internet “platforms” (e.g., Sparetoolz) allow people who have resources to make connections with people who need resources by lowering the search costs. If I have a tree trimmer that I’m not using, I can post that information on Sparetoolz and somebody in the local area who needs to trim some trees can find me easily. These apps make transactions more likely because they provide third-party payment options and rating systems that allow each party to know that the transaction will be completed as agreed upon. In other words, platform-based network companies also sell trust.
UberEats does the same thing as tool sharing services, but the resources being offered up not only include the delivery vehicle but also the labor of the driver. Basically, these companies provide a way for people to perform tasks for one another on a short-term basis.
What is brilliant about this business model is that these network companies do not own the resources they are transferring between individuals, nor do they employ workers to perform tasks directly (other than they employees who help keep their software running and market the service). Uber does not own a fleet of automobiles, nor do they retain full-time drivers like a cab company does. This is important, because DoorDash drivers are not your typical wage-earning hourly employees. But the Seattle City Council transforms them into just that, and that has important consequences for drivers and consumers.
To understand those consequences, we need to consider how workers are paid.
Have you ever wondered why some workers receive wages while others are salaried? Many of my students think that it is related to the prestige of the job with white collar professionals being paid salaries while blue collar workers earn hourly wages.
But wages and salaries aren’t the only way that people performing labor can be paid. There is also the possibility that a worker could be paid by the piece. For instance, for every chair a factory worker makes, he might receive $25. If that seems odd, consider that hiring a gardener to mow your lawn once a week is basically an employer-employee relationship wherein you are paying the gardener by the piece (i.e., one freshly mowed lawn).
Now you may object and say that really isn’t an employer-employee relationship because you (the homeowner) do not have a payroll department, contribute to Social Security (FICA) taxes, provide health insurance, or negotiate paid time-off for sickness. Those are all the things that define a real employer-employee relationship.
Says the government!
But what the government says does not change the inherent nature of the exchange. This is a point I made in an earlier AIER article where I asked “when does a job become a job?” The point is that any employer-employee relationship is merely an exchange, just like any other exchange (such as buying soup at a restaurant). Sometimes the exchange is very simple and intermittent, as when I employ a gardener to cut my grass once a week. Yes, that makes me an employer. Sometimes the exchange is more complicated in that I want an individual to show up at a building five days a week for eight hours at a time and weld steel plates together.
So how does this relate to compensation?
Whether one is paid by the task (piece-rate), an hourly wage, or a salary depends on the nature of the task at hand, the frequency of the task being performed, the incentives faced by the employees, and the transaction costs in monitoring whether the employee accomplishes the needed task properly.
I do not pay a gardener an hourly wage and put him on a regular payroll because I only need that task performed intermittently, perhaps one hour per week for five months in spring and summer. Having to retain him forty hours per week, pay insurance, offer sick pay, and the like would make hiring this person so cost prohibitive that I would end up doing the mowing myself. This is not beneficial to me or to the gardener. Independent writers operate on the same basis, as do contractors who might sign a two-month contract to design websites for a business. The fulfillment of the contract can be monitored fairly easily; either the lawn is mowed or it isn’t. The incentive of the independent contractor is to do a good job but also in a timely manner so he can move on to the next paying task. Paying an hourly wage to such a worker would only incentivize him to slow down. Piece-rate (or contract service) pay makes sense here.
Hourly workers are paid a wage because they are needed for a more consistent period of time, perhaps six hours a night to wash dishes and mop floors. In many of these instances, paying per task completed would not make much sense since the nature of the tasks might vary. Sometimes there are a lot of dishes to wash, other times none. In the latter case, the hourly wage earner might be shifted to another task (e.g., reorganizing the walk-in freezer). Moreover, certain jobs are more amenable to be monitored by time rather than completion, particularly those that are routinized (e.g., assembly line work) or that require “being there” to perform tasks according to what is needed at any moment. In these cases, it is much easier to monitor the worker’s performance based upon time on the job.
Salaried work usually involves labor that is difficult to assess the direct quality of, such as university teaching. The tasks may also involve problem-solving skills and other creative work that has no specified time frame and involves the input of many other individuals such that it is difficult to disassociate the effort of one employee from another. The ability to monitor performance is rather difficult and the employer does not want to incentivize the worker rush and make errors (as per piece-rate compensation) or slow walk their work (as would be the incentives under an hourly wage). Of course, the employer still must develop ways to determine the quality of the work, but that relies upon creating incentive structures separate from pay.
So how does this relate to our DoorDash drivers in Seattle?
For all intents and purposes, app-based delivery drivers are contract or piece-work employees just like my gardener, albeit with less regular customers. They perform services for different people according to when a task is requested. This is the nature of the platform-based sharing economy – unused resources (including labor) are connected with people who want to use those resources on a short-term basis. Such work is great for individuals who want to pick up some extra cash now and then by working the days and hours that they choose. The employee-employer contract does not specify exact times that they have to work like your typical 9-to-5 clock puncher. An opportunity to run a delivery is offered up on the app, a driver can choose to take it or defer to somebody else. This is clearly “piece-rate” work. If the driver is feeling ill on a particular day, he can choose not to deliver.
But requiring mandatory sick pay, as Seattle City Council’s new ordinance does, transforms these jobs into something resembling hourly pay. The ordinance states, “App-based workers shall accrue at least one day of paid sick and paid safe time for every 30 days worked…in whole or in part in Seattle.” Given that drivers may only be doing a few runs per day, adding up to perhaps an hour or two of work, the calculation of owed sick pay becomes somewhat convoluted. As per p. 28, the network companies will need to record each day the driver worked (even, apparently, if it was only one quick delivery) and then calculate the average daily compensation over the courses of a month. This becomes the basis for the sick pay.
Think about the incentives here and how it changes the way drivers work.
Prior to this law, if an individual merely wanted to earn a few bucks for weekend fun, he could choose to do just a few deliveries, possibly picking up $40 or $50. This is akin to a neighborhood kid mowing a lawn or two to buy comic books. But with this ordinance, drivers who accrue more deliveries per month and earn more compensation will get more in sick pay. In essence, this policy pushes what is a part-time side hustle into a full-time (40 hour per week) job.
One potential outcome here is that more individuals will be moving towards full-time employment and crowding out individuals who merely want to use a few spare hours to get a bit more cash. To the extent that these app-based companies are about matching unused resources, no matter how small, to those who want to employ those resources, this policy undermines the most beneficial aspect of the sharing economy. Moreover, incentivizing people to become full-time delivery drivers would be more amendable to unionization and make demands for benefits such as medical insurance. And then there is the government’s interest in seeing these part-time side hustlers eventually becoming more traditional employees, as they become sources to collect payroll and other taxes.
All of this will likely raise the price of delivery services. That is not good for tired consumers who don’t want to go out for a meal or groceries. Basic economic theory tells us that as prices go up, demand will drop. And as demand drops, there will be less need for supply. This hurts delivery drivers who may now be making fewer runs and earning less net pay overall.
The arrival of the app-based network companies was a huge boon to our economy’s efficiency. It allowed unused resources to find employment in ways that we had never imagined. Government interference in the way we operate new economies undermines innovation, entrepreneurship, and productivity. And all of this can be done by a simple stroke of a bureaucratic pen that redefines the nature of work. The definition of what constitutes exchange is best left to the individuals who are directly involved in those transactions.
Many of my political science students consider government to be the place where big ideas of economic and social policy are hashed out to create a better world. I tell them that much of what government does is simply defining things so as to regulate them. This can be seen in the new Seattle ordinance. The 46-page (double-spaced) document spends nine pages (pages 4-13) simply defining various words that are associated with the ordinance, including “child,” “grocery store,” and “dating relationship.” Readers are encouraged to view this document to understand how powerful the ability to define things is.