Thursday, May 28, 2015

The Sharing Economy

The nickname "the sharing economy" seems like a triumph of public relations artistry. The term refers to firms based on software that allows people to rent a room in someone's house (like Airbnb) or pay for a ride in someone's car (like Uber or Lyft). At least in the kindergarten where I learned all of my sharing values, being compensated was not a form of "sharing." As an alternative title, I've proposed the "finding ways to get paid for excess capacity" economy, but it doesn't quite trip off the tongue. Better is the "matching economy," which captures the idea of using the web to match up a potential buyer and seller who would otherwise have had no way to connect.

Firms like eBay can be thought of as the first generation  of the matching economy, but people selling stuff to each other displaced relatively few existing workers and raised relatively few public policy issues. Tim Sablik offers an overview of the current issues in "The Sharing Economy: Are new online markets creating economic value of threatening consumer safety?" in the Fourth Quarter 2014 issue of EconFocus, published by the Federal Reserve Bank of Richmond. He points out that in some industries, the growth of supply as a result of the matching economy has been quite substantial:
"The Bureau of Labor Statistics reports that there were 233,000 taxi drivers and chauffeurs in the United States as of 2012, but new services are substantially adding to that number. According to a recent study by Uber's head of policy research Jonathan Hall and Princeton University economist Alan Krueger [discussed here], the company had more than 160,000 active U.S. drivers in 2014. That alone nearly doubles the supply of short-term transportation, not counting Uber's competitors like Lyft and Sidecar. Similarly for the hotel industry, Airbnb boasts over a million properties in nearly 200 countries, surpassing the capacity of major hoteliers like Hilton Worldwide, which had 215,000 rooms in 74 countries in 2014."
Sablik points to evidence that the additional competition has led to better deals for consumers, not just the consumers who use matching economy firms, but also because the traditional competitors offer better deals, too. The matching economy firms can be especially useful when there is a spike in demand--like a city hosting a Super Bowl or a political convention. Moreover, the idea of the matching economy is taking on many forms. Here's a list of some sharing economy firms from Sablik:

An article in the Economist magazine for January 3, 2015, discussed how the matching economy was reaching into the labor market.
"In San Francisco, ... young professionals ... can use the apps on their phones to get their apartments cleaned by Handy or Homejoy; their groceries bought and delivered by Instacart; their clothes washed by Washio and their flowers delivered by BloomThat. Fancy Hands will provide them with personal assistants who can book trips or negotiate with the cable company. TaskRabbit will send somebody out to pick up a last-minute gift and Shyp will gift-wrap and deliver it. SpoonRocket will deliver a restaurant-quality meal to the door within ten minutes."
So what are the issues or problems with the matching economy? Here is how I see them.

1) The new suppliers in the matching economy only have a cost advantage because they are breaking existing rules or otherwise underregulated. When you purchase a traditional taxi-ride or a hotel room, you are actually paying for more than the basic service. You are also paying for health and safety inspectors, for an assurance of certain kinds of required training and certification, for liability insurance, for limits on the possibilities for price-gouging, and often for brand-name reputation. From this standpoint, the problem isn't that there is more competition, but rather that the competition doesn't need to play by the same rules.

This concern has some force, but there are counterarguments. It's worth noting that new entrants are not completely unrestricted. Many of the matching economy firms do background checks on those providing services, and may require that they carry specific insurance. Users of the services can rate the providers, as well as looking at previous reviews. Sablik writes: "Portland, Ore., has partnered with Airbnb to promote the service through its tourism bureau. The city may stand to gain from the deal. According to Airbnb's own studies, its guests tend to stay longer and spend more than typical tourists. For its part, Airbnb agreed to work with the city to ensure hosts meet safety requirements. It also agreed to collect and remit lodging taxes to Portland on behalf of its hosts."

The rise of the matching economy should also force government to take a fresh look at what regulations are needed. However, it's a well-known phenomenon in regulatory economics to have a situation in which large existing competitors welcome regulation, because the regulations help to block small and innovative new competitors--and the costs of the regulations can then be passed along to consumers. Maybe it's an obvious point, but the goal of regulation be to provide benefits to consumers in excess of the costs imposed, not to hobble new competitors. The appropriate regulations for Airbnb should differ in a number of relevant ways from the regulations for a standard commercial hotel.

2) Benefits to consumers should matter a lot.  may well be true that some of the advantage of matching economy firms is that they face a lighter regulatory hand, but that's probably not their main advantage. The main advantage is that customers like what they provide. Who benefits the most from having a greater supply of car-ride services in New York? It's clearly those with low incomes, who have an improved option to call for a ride, to know who is coming, and to know what the price will be. Some people will feel more secure riding with someone whose name and face and customer reviews they can see in advance, rather than with a stranger who drives up in a taxi. Some people like staying in other people's houses, at least some of the time, while others prefer the characteristics of a hotel or resort, at least some of the time. It

3) Too many of the jobs in the matching economy are low-paid temp work, not "good" jobs.  It's easy to conjure up a mental vision in which the matching economy comes down to rich people paying poor people to drive them places, pick up their dry-cleaning, deliver their groceries, and the like. It's also easy to imagine that the workers in those jobs may be working for low hourly pay, with unreliable fluctuations in their income and no benefits. Clearly, some of the jobs in the matching economy will fall into that category. But not every job needs to involve a career path. it's easy to think about someone who is just trying to pick up some extra income, like a college student, who is delighted with the flexibility of the job. Moreover, at least some of the matching economy companies are guaranteeing workers who want it a minimum number of hours, or offering benefits like insurance.

Overall, my own sense is that some jobs are just hours and a paycheck, and other jobs are careers. Trying to more toward an economy where career-type jobs are more available--meaning jobs where there is value to a lasting tie between worker and employee, and where the employee has  possibilities for initiative, growth, and advancement, is a policy challenge for another day. Here, I'll just note that  we are going to start passing rules and laws that only "good" jobs are allowed,  while trying to limit jobs with low pay or limited prospects, it's not clear to me that jobs in the matching economy are the problem, or that jobs in the matching economy are worse more than a lot of existing jobs in the conventional hotel or taxi industries, or in the retail and services sectors in general.

4) Current suppliers of the service don't like the new competition. Without meaning to be hard-hearted about it, my sympathy level for this complaint is low. As Sablik points out, in New York city it cost about $1 million to buy the medallion that gives the right to drive a traditional taxicab. That high price suggests that existing owners (who are often quite different from the taxicab drivers) had been quashing new competitors and earning monopoly profits. If we want an economy that is growing and offering opportunities, we need to accept that current suppliers of goods and services will face new competition and need to adapt.