Minimum Wage Laws and App-Based Workers

My new study finds that app-based platforms created an option to support the earnings for workers even in the context of a negative employment effect from increases in minimum wage laws

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This week in Labor Market Matters is a Guest Post by Benjamin Glasner, an economist at Economic Innovation Group, who recently published a study entitled “The Minimum Wage, Self-Employment, and the Online Gig Economy.”

Last week, Uber and Lyft threatened to leave Minneapolis after local lawmakers voted for a law guaranteeing a minimum hourly wage for drivers. And, earlier this year, workers using delivery apps in Seattle became eligible for the App-Based Worker Minimum Payment Ordinance. The Minneapolis ordinance requires ride-hailing services to pay drivers a minimum rate of $1.40 per mile and 51 cents per minute, while the Seattle ordinance stipulates that covered workers receive a “minimum per-minute amount of $0.44 and minimum per-mile amount of $0.74” or a “minimum per-offer amount of $5.”  

Regulations guaranteeing a minimum wage are among the latest methods that lawmakers are pursuing to  support workers that have fallen through the gaps in our labor policies.

For those who have followed the evolution of the minimum wage literature, both the concerns and enthusiasm surrounding these new minimum wage regulations should be of no surprise. Platform companies are announcing their plans to cover the cost of the policy through higher prices or to leave the area all together, like in Minneapolis. While it is still early in the implementation, and the net welfare effects across workers, businesses, and platforms have yet to be made clear, it is worth adding some context to policy and the broader debate. 

The policy environment

The Fair Labor Standards Act (FLSA), first passed 85 years ago, represented a revolutionary step toward the regulation of the labor market. The FLSA brought about the federal minimum wage, overtime pay, and employment standards for young workers and children. It was also among the first and most significant policies operating along a classification criterion of labor within the US.

When first passed, the FLSA’s minimum wage did not cover agricultural, restaurant, and other service workers. This was in part a carve out due to fears that “the act’s proponents were motivated by a desire to destroy the ability of low-wage southern industry to compete with the rest of the country.”  It was not until the 1966 amendment to the FLSA that the minimum wage was extended to these jobs. Those jobs happened to employ a disproportionate share of black workers, which resulted in a significant reduction in the black-white wage gap.

The current push to extend similar earnings standards to platform and app-based workers would seem in line with this historical precedent. Food delivery and driving services are a common and well-established source of income, performed across the country and by a variety of workers. So what has been the barrier to expansion of coverage thus far?

Organizational structure and work classification, or misclassification depending on audience, are the root of the issue.

We do not see attempts to incorporate the self-employed into the FLSA’s minimum wage. Minimum wages would seem a poor tool to boost the earnings of those “employing” themselves, regardless of industry, occupation, or prevalence of work. Independent contracts fall into the self-employed bucket. Taken under generous guidance, independent contractors manage their own work and earnings as they interact with the public market for their goods and services. For those managing their own work, a minimum wage is far from the ideal tool. It is a hammer among screws.

The policy concern is that the modern gig/platform/app-based worker has fallen down a fissure of labor market policies. One that is not impervious to patching over but is poorly suited to our readymade solutions. That is not a reason to abandon the ambition of supporting these workers. Rather, it is a motivation to think creatively about which policies could be most effective at reaching our social goals.

Minimum wages and app-based workers

Not long ago, while I was living in Seattle, I studied the relationship between the minimum wage among covered workers and the self-employed.  Specifically, I studied the effect of minimum wage increases on work that is not covered by minimum wage laws, including both the traditional self-employed and app-based workers. At the risk of spoiling roughly 40 pages of riveting analysis, I found that:^[1]

1. The traditional self-employed are largely unresponsive to a minimum wage increase.

2. The number of app-based workers grows following a minimum wage increase.

3. The areas that exhibited the largest response to minimum wage increases were large urban competitive labor markets with an active app-based labor market.

All three of these results fit neatly together with some theory from the 1970s that outlined a model of the minimum wage across two labor markets, a covered labor market (regulated by the minimum wage laws) and an uncovered labor market (not subject to minimum wage laws). The articles demonstrated that if minimum wages were increased above the equilibrium price in the covered labor market, resulting in a negative employment effect among covered workers, then workers would flow toward the uncovered labor market which was not regulated by the minimum wage laws.

The covered and uncovered labor market has generally been composed of different workers. The covered minimum wage worker, and the uncovered self-employed entrepreneur, were viewed as different in a multitude of ways. One would expect that the traditional self-employed would not be swayed to enter or leave the uncovered labor market because of a small change in the prevailing minimum wage. So, the covered/uncovered dynamic fell to the side of the debate. That is until a greater variety of worker types began falling into the uncovered labor market. While the entrepreneur may have been unlikely to be swayed in one way or another by the minimum wage, the Uber driver just might be. 

For example, if a minimum wage barista found themselves getting scheduled for fewer hours following a higher minimum wage (a negative employment effect in the covered market), they could pick up hours driving for Uber to make up the difference (positive employment effect in the uncovered market). That same worker probably could not have started a new coffee shop on the side. On the other hand, higher minimum wages could entice workers to shift away from the uncovered market. If minimum wage increases did not produce a negative employment effect among covered workers, and demand for work in the covered market remained high, the higher wage rate could result in fewer Uber drivers. Our barista might leave Uber behind and pick up a spare shift.

When the theory was put to the test, I found that when minimum wages increased, the number of Uber drivers increased as well. I also found that the average earnings of those drivers fell as more entered the uncovered market.^[2] The availability of an uncovered labor market with low barriers to entry and exit meant that excess labor supply from the covered market could transition to the uncovered market.

These app-based platforms created an option to support the earnings for workers even in the context of a negative employment effect from increases in minimum wage laws. 

What does this mean for workers?

These results led to a few conclusions with relevance to today’s efforts toward supporting app-based workers and regulating the numerous platforms they participate in.

While minimum wage laws have a limited impact on uncovered work arrangements in aggregate, app-based workers are a niche of uncovered labor that is significantly responsive to the minimum wage. That responsiveness is not a direct result of minimum wages, but rather a secondary characteristic of the nature of these platforms. These apps can accommodate significant flows of labor when allowed to be, and regulated as, a marketplace for buyers and sellers. App-based platforms are at their most useful when they are flexible. Their key contribution is to serve as a match maker between labor supply and labor demand – processing information for independent actors. That comes with the risk of volatility.

The instituting of a minimum payment ordinance converts the uncovered labor market into a quasi-covered market. It restricts the type of transaction that can take place on these platforms and limits the choice set of independent actors, both buyers and sellers. The labor platforms become rigid and poor complements to an already established covered labor market. 

Alternatively, policies could be more creative in how they support the earnings of app-based workers. Rather than copy regulations designed for a different style of work, policymakers could embrace the benefits of a flexible marketplace, and tailor support for workers around that flexibility.

One of the easiest solutions would be implementing a “minimum fee share” rather than a minimum payment. Many platforms operate on a model which extracts a percentage of fees paid by buyers to sellers for their service. That model is not unique to Uber, Lyft, or DoorDash. Platform markets like Airbnb, Etsy, and even an old guard like Ebay all extract a fee for hosting the exchange of good and services. To preserve the value of the price signal in the marketplace, a fee floor could support the earnings of app-based workers without undercutting the flexibility of the platform.  

What would a fee floor look like? Let’s use a clearly defined fee structure to ground us. Etsy uses transaction fees to collect revenue when a consumer makes a purchase from a hosted seller. They charge 6.5% of the total order amount – including shipping and gift wrapping. A fixed rate fee that creates an incentive such that  Etsy makes money when their platform successfully matches a buyer and a seller.

Rideshare apps are not too different. They generate revenue by taking a share of the total cost paid by riders to drivers. What is less clear is how large that fee is and how that fee has changed over time and across platforms. Rather than seeking out a rigid wage floor, a fee floor could stand in for the sense of fairness across platforms of different types.  

If workers on platforms are truly entrepreneurs, picking and choosing when, where, and how to allocate their labor across multiple platforms, doing more to ensure that markets offer a fair share of revenue can get the job done far more efficiently than attempting to mandate any particular amount.

Notes

^[1] I used Nonemployer Statistics (NES) data from 2000 to 2018 to estimate the size and composition of the labor market uncovered by the minimum wage. The NES collects annual data on nonemployer establishments – a business that has no paid employees, has annual business receipts of 1,000 dollars or more (1 dollar or more in the construction industry), and is subject to federal income taxes. Most nonemployer establishments are self-employed individuals running small unincorporated businesses, which includes independent contractors. Participants in the gig economy often find themselves in the bin of nonemployers along with other traditionally self-employed and non-gig independent contractors.

^[2] Specifically, I found that a 10% increase in the minimum wage resulted in a 2.7% increase in the number of nonemployer establishments classified as transportation and warehousing services. I found this effect at the county level and it was driven by areas where Uber was active and where the level of labor market concentration was low. I also found that the average receipts of nonemployer establishments fell. I did not find significant effects among counties with high levels of labor market concentration, where monopsonistic or oligopsonistic competition is most likely to occur.