Last month Uber CEO Travis Kalanick, an outspoken libertarian prone to fits of government-bashing, paid Obamacare a somewhat surprising compliment. “It’s huge,” Kalanick said of the program. “The democratization of those types of benefits allow people to have more flexible ways to make a living, they don’t have to be working for The Man.” In layman’s terms, Kalanick was conceding that the so-called sharing economy, in which people use apps like Uber to find their next “gig” rather than seek traditional employment, can only work on a mass scale if the government kicks in the benefits associated with traditional employment.
This is unquestionably true, and, frankly, a point that’s been rather obvious to Obamacare supporters for years. It doesn’t just touch health care, of course, but also pension benefits (Social Security cuts are an even worse idea if you don’t have a 401k) and unemployment insurance (there’s no severance pay and lots of volatility in the sharing economy).
But there’s still another form of social insurance that employers have provided for decades, and whose erosion the sharing economy is rapidly accelerating: wages. And preserving that benefit may be the most critical role that government can play in the economy going forward.
We don’t normally think of wages as social insurance—classical economic theory says a company should pay you your contribution to its bottom line, no more and no less. But, in practice, the wages companies paid throughout the 20th century had some key features of social insurance.
Basically, many of us got paid more than what our skills were worth on the open market, while a small handful of superstars got paid substantially less than their skills were worth. For example, if you worked on a car assembly line, your employer almost certainly paid you a higher wage than he or she could have paid someone plucked off the street to do the same job. Conversely, if you were a brilliant engineer who came up with some design innovation that made the auto manufacturer billions of dollars, you probably pocketed substantially less than the full market value of your skills.
Something similar also happened within occupations. Last year I wrote about the misery of being a partner at a major law firm these days. But, for years, legal partnerships practiced a rather aggressive form of redistribution. The big rainmaker partners were paid incredibly well—taking home $3, $4, $5 million a year. But they were paid substantially less than they would have commanded in a wide open market. In return, many junior partners, or partners who brought in little business for the firm, earned far above what the free market would have awarded them. It was a bit like professional sports before the era of free agency.
Now, obviously, employers didn’t set out to use wages as the basis for some elaborate social insurance scheme. They did this partly because they were pushed by unions, partly because no free market actually existed for their employees’ labor (if you were a law firm looking for paralegals, you couldn’t just go to the local paralegal exchange and pick out the cheapest ones), and partly because companies were organized in a way that made it hard to take an open-market approach to hiring and paying workers. It was often easier to overpay for unskilled workers, just for the certainty of knowing they would be there when you needed them. It was often easy to underpay for highly-skilled, superstar labor, because big companies had pay-scales and other norms that placed an effective limit on how much any one employee could earn above colleagues doing similar work.
But the practical effect was very similar to, say, Obamacare: The system pooled risk and transferred money from rich to poor.1 Highly paid workers effectively accepted a discount on their earnings and, in exchange, were insured against the possibility that the value of their skills would completely collapse. Overall, the system reduced inequality and made people at the bottom substantially better off.
No doubt the trend away from this model has been at least a generation in the making. Between the rise of outsourcing, the decline of unions, the erosion of norms that tended to equalize pay both within and across jobs inside a company, and, perhaps most importantly, the rise of an increasingly free market for various kinds of labor, superstars are steadily capturing more of what they’re worth, and the folks at the bottom are losing their old premium. Rainmaker law partners now regularly schlep their practices from firm to firm in search of the highest bidder. Star bond traders reap such enormous bonuses they sometimes take home more than the CEOs they nominally report to. Meanwhile, workers at North Carolina textile mills have come to understand that their pay is pretty closely tied to what their Bangladeshi counterparts can earn for similar work.
But all those forces may be nothing compared to the rise of the sharing economy. As I noted in a recent piece, there’s a growing number of Uber-like platforms that not only connect individual service providers with individual customers—drivers, deliverers, handymen, house cleaners—but which help larger companies replace fulltime employees with freelancers who can do the work as they need it done. We’re not far from the day when a factory will be able to perfectly tie its stock of assembly-line workers to its daily or even hourly demand for them, and therefore will no longer build a staff of fulltime workers big enough to handle peak production. And it’s not just blue-collar workers. A similar thing is happening for nurses, lawyers, even management consultants.
For the superstars, this will almost certainly be a boon. They will be able to make far more money on their own, charging by the gig, than they ever made with a fulltime job. For the rest of us, it will mean somewhere between a slight and a catastrophic drop in income. Inequality, which has increased to an alarming extent in recent years, will accelerate. The ranks of the working poor will, too.
Which, as it happens, brings us back to the point Travis Kalanick made in praise of Obamacare. If the sharing economy is massively unraveling the social insurance aspect of wages that has sustained Americans (and ensured basic social cohesion) for decades, making the sharing economy viable would seem to require the government stepping in to provide that same insurance. Marginal tax rates on the ultra-rich would have to rise dramatically. This would fund a direct cash payment to other workers, especially lower-income workers, to top off the wages the sharing economy has depressed. Combining this large-scale wage insurance with a beefed up version of the existing safety net--like more generous Social Security and unemployment benefits--would give middle- and working-class people a chance to hack it in the economy of the future.
I have no doubt Kalanick would chafe at this idea. But it’s very much in keeping with the logic of his support for Obamacare. And, in any case, the alternative is quite bleak: a 19th century-style economy with a small overclass and a huge mass of disaffected workers, the kind of situation that led to political radicalization back then. If Kalanick wants a world in which Uber and its imitators can realize their utopian ambitions without triggering a backlash that will make the recent unpleasantness in Europe look like a mildly contentious segment of “Meet the Press,” he and his fellow sharing-economy moguls should give wage insurance some serious thought.
Interestingly, the wage-as-insurance market suffers from the same adverse selection problem as the health insurance market. In health care, you need a mix of healthy and unhealthy people in your insurance pool to make the scheme work. If the healthiest people opt out, the average cost of insuring each person will rise, making it a bad deal for the next healthiest group and leading them to opt out, raising the average cost again, and on and on until the whole thing collapses. In the same way, if the biggest rainmakers leave a law firm, the average pay goes down, leading the next most desirable group of partners to want to leave, lowering the average pay again, and on and until the whole thing collapses.