The Quiet Risk in California’s New Gig Worker Law

SMITH BRAIN TRUST – A new law in California mandating stricter employment rules for drivers and other gig-economy workers isn’t good news for Uber or Lyft. And it may not be good for the rest of us, either, warns Maryland Smith’s Brent Goldfarb.

That’s because the new law – which states that as of Jan. 1, gig workers must be treated as employees, not as independent contractors – may lead to an increase in labor costs, potentially threatening those companies’ very existence. And if Uber and Lyft shrink or disappear, Goldfarb warns, that’s a lot of lost wages for a lot of people.

Goldfarb is an associate professor of management and entrepreneurship at the University of Maryland's Robert H. Smith School of Business. He has researched extensively the startups of the gig economy, in part for the 2019 book, Bubbles and Crashes: The Boom and Bust of Technological Innovation, which he co-authored with Maryland Smith’s David A. Kirsch.

Analysts have estimated that the change in California’s law would increase labor costs for the likes of Uber by 20% in that state. “Significant,” says Goldfarb.

“If these companies end up having to pay their drivers more, someone’s got to pay for that,” Goldfarb says. “And the people who are going to pay for it are the customers.”

Neither Uber, nor Lyft has had a single profitable quarter. “Neither even has a good story of how they will become profitable,” says Goldfarb. “We’ve seen no evidence that either one can be profitable doing what they’re doing.”

The two companies have seen astronomical growth in their short lives. “They offer a great, great service,” says Goldfarb. “But it’s not just great because it is so convenient, it’s great because it’s cheap.”

“And cheap isn’t sustainable in this industry.”

Ride-hailing is a highly competitive, low-margin business. And both Uber and Lyft, with their low-cost rides, are bleeding capital.

With $13 billion in cash and no additional capital raises, Uber likely has about three years until it runs out of money, Goldfarb says, at its cash-burn rate of $1 billion quarter. Lyft’s lifespan looks similar, he says, with about $3 billion on hand, and burning about $250 million per quarter.

For Uber and Lyft, the consequences of raising prices to grapple with increased labor costs are simple supply-and-demand economics. As the price of a ride goes up, consumer demand goes down.

People will opt to walk, cycle, use public transit, or drive themselves, resulting in fewer rides on Uber and Lyft. The result could be a collapse of one or both companies, or, Goldfarb says, “we might end up with a viable business that’s more expensive and a lot smaller.” Either way, getting there isn’t likely to be pretty.

“The thing that I find extremely concerning is that Uber and Lyft and some of the other delivery apps, they employ a lot of people,” Goldfarb warns. “Those people might not be employed well, but they are employed. They have a source of income. And that’s important.”

Uber and Lyft have never endured a U.S. recession. But if they continue to operate, they will someday. And when it happens, Goldfarb says, “it won’t be good.” It will shrink revenue and sour investor sentiment. And that part will be “devastating,” he warns. “Investor sentiment is incredibly important here. These companies are losing money. They need to be able to continue to raise money from investors just to continue operating.”

On the other hand, were Uber and Lyft to shrink considerably or disappear suddenly, that would deliver a “large negative shock” to the U.S. economy.

“It’s kind of insidious, because if these companies go under, they will make any kind of U.S. recession worse, just by throwing a whole bunch of people into unemployment – some of them, maybe a lot of them, with car loans.”