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A Secret of Uber's Success: Struggling Workers

Katie Benner is a Bloomberg View columnist who writes about technology, innovation, and the cult and culture of Silicon Valley. She lives in San Francisco.
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Whether or not you know the term "on-demand economy," if you've used a smartphone application to summon a driver or a delivery person to get you some food then you know what it is -- a hassle free way to find workers when you need them for a pretty low price.

Startups that connect service workers and customers have raised lots of venture capital based on the idea that low prices will democratize and popularize services that were once reserved for the rich. The viability of these enterprises is tied to scale. Once they are popular and ubiquitous enough, the argument goes, they'll transform massive swaths of the service economy including transportation, retail and the workforce itself.

To become ubiquitous, these companies need lots and lots of cheap contract laborers to serve customers who want them to be available at the push of a smartphone button. But there's a big vulnerability in all of these business models: They wouldn't work if they had to offer full-time jobs with substantial benefits, and the reliance on contract workers to sustain this burgeoning market has become controversial. Kevin Roose recently noted in New York magazine that an emerging "1099 economy" explains how it's "possible for a cash-flush tech start-up to have homeless workers."

The popular on-call car service, Uber, for example, needs hordes of drivers if it wants to make taxis obsolete and largely eliminate the use of personal cars, presumptions that underpin the company's $18 billion stock market valuation. Nasty battles for drivers between Uber and one of its competitors, Lyft, further hammer home that point.

People are attracted to on-demand gigs because more solid full-time work is still hard to come by in a U.S. economy that has rebounded for everyone but average workers. Should the job market eventually strengthen, workers will have more options and may choose jobs that give them more benefits and more financial control over their lives.

In a speech Thursday at Northwestern's Kellogg School of Management, President Obama emphasized that the economy has recovered since the recession, but conceded, as he did during a recent 60 Minutes interview, that many Americans don't feel like things are better "because incomes and wages are not going up."

Since the recession began, U.S. unemployment has fallen from a peak of about 10 percent to 6.1 percent. Even so, Brookings Economist Gary Burtless says that an additional two million or so people have been out of work for so long that they've stopped looking for work. And University of Chicago economist Steven Davis says that job fluidity (econo-speak for workers' ability to move from job to job) is stagnant. All of this depresses wages and locks many younger and less educated workers out of full-time positions.

And the unemployment drop doesn't account for declining wages. As my colleague Mark Whitehouse has pointed out, wage growth in "non-knowledge" sectors of the economy has been anemic and still trails "the pace at which workers' output per hour has increased during the recovery." This chart from his analysis shows how bleak it is for wage-earners at the lower end of the job market.

Cash-strapped middle-class Americans are in a better position to work for an employment-on-demand company, since they're more likely to own a smartphone and a car than the ranks of the perpetually unemployed or adults who are born into generational poverty. But some companies are finding creative ways to expand their labor pools.

Uber, for example, rents smartphones to its workers. It also offers them discounted auto loans and lease agreements to help them secure cars. When Uber announced those financing deals last year, its chief executive, Travis Kalanick told Bloomberg News: "The demand is there, but if we don't get the cars on the road -- if we don't help our partners and drivers get cars on the road -- then it just doesn't matter. We're just not going to be able to grow."

Uber was roundly criticized this week for a blog post congratulating itself for helping teachers, who are "asked to do more with less" by allowing them to use their own cars, fuel and auto insurance to make money as Uber's drivers-for-hire. Uber thinks of the app it makes, the phones it rents, and the auto loans it offers as a kit -- entrepreneurialism-in-a-box, you might call it. The reality of this for Uber drivers is quite different. Instead of building the next Facebook, these would-be entrepreneurs are driving Facebook employees to and from parties before going home to work on lesson plans and to grade papers.

Uber's post was tone deaf, but the larger problem that Uber didn't create is that teachers in some parts of the country -- and many other workers -- don't earn enough to avoid pursuing after-hours work in order to pay their bills. Companies like Uber offer them something of an answer to that problem, though not a solution.

When I talk to people who work for the on-demand services I use -- Lyft, Task Rabbit and Uber -- most often they're making supplementary income or they work a series of part-time jobs because they can't find full-time work. The Task Rabbit worker who assembled my Ikea furniture lost his job as an engineer and his skills grew stale. A recent Lyft driver worked in marketing at a financial firm and was laid off during the recession. An Uber driver was a teacher who, yes, needed extra money for bills.

To be sure, the flexibility of contract work can be a good thing, especially for those who want to craft their schedules around times that work best for them. (Unlike the jobs in the on-demand economy, lots of traditional part-time jobs offer no flexibility because they force employees to be on call for work that may never come, as was starkly detailed in this New York Times story.)

If investors are worried that there might not be enough workers to keep on-demand businesses humming, it hasn't shown up in the numbers. Venture capitalists have sunk $3.6 billion into on-demand service apps since 2009, according to a recent analysis from Sherpa Ventures, a venture firm. The two best-known names in the ecosystem, Uber and Lyft, now have a combined paper value of nearly $30 billion. (By comparison, Twitter's market cap is about $31 billion.)

Yet all of that smart venture funding that's chasing the hottest on-demand companies -- such as Uber, Lyft, Task Rabbit, Postmates and Homejoy -- assumes that inexpensive and readily available labor will be a constant. Should workforce conditions that give on-demand companies one of their competitive advantages evaporate, then the trajectory of many of these start-ups might flatten.

Boosters say that the on-demand economy is an innovative, hyper-efficient way to deploy the workforce, while detractors say it's more evidence that the tech industry is missing an empathy chip. Wherever you land in that analysis, there's no question that the on-demand economy is an offshoot and a beneficiary of the fact that many U.S. workers are struggling. In that regard, on-demand companies are not Silicon Valley inventions that are changing the nation. Rather, on-demand has thrived, in part, because the nation has dropped a bedraggled and optionless workforce in its lap -- and on-demand's success depends in part on the idea that our nation won't change.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editor on this story:
Timothy L O'Brien at tobrien46@bloomberg.net