Sharing isn’t caring from workers’ POV
The sharing economy is booming. Today, we can source funds for our innovative ideas from the “crowd”, lend tools to our neighbors, rent a room in someone’s apartment and catch a lift in someone’s car. Think of Airbnb, which allows real estate owners to rent out rooms or houses for short-term stays. In New York City alone, the platform is seeing spectacular growth.
Airbnb enjoys spectacular growth in New York
Source: “Airbnb in the City”, Office of the New York State Attorney General
How does the rise of the sharing economy impact the old, regular economy? The Global Macro Research team at Pavilion Global Markets examined the issue in a recent note to clients. The team found that most innovations in the sharing economy consist of platforms to match sellers and buyers of existing products and services. That is, there are no new products or services created. In the case of Airbnb, hotel rooms existed before. The same is true of Uber or Lyft—taxis existed before and nothing new has been created. In this context, Pavilion’s research team came to three conclusions. In the sharing economy, additional capacity of existing products and services is released into the market and the increased competition is lowering prices, an intermediary is taking a cut, and workers are not benefiting in any way.
- The sharing economy releases previously unused capacity into the market, putting pressure on prices. Pavilion’s research team pointed to a recent study which looked at the impact of Airbnb on the Texas hotel market. The study found that in Austin, where Airbnb has the strongest footprint, the impact on hotel revenue was around 8-10%, with hotels not catering to business travel feeling the biggest pinch. The study also found that all hotels responded by lowering prices.
- Platform founders monetize their innovations by charging per-transaction fees. Sharing platforms match buyers and sellers. An intermediary takes a cut. Remember these aren’t new services, simply a change in the way existing services are obtained. Therefore, the platforms are not making labor more productive. For example, applications such as Uber or Lyft do not increase the number of passengers. Rather they make it easier for the passenger to order and pay for a car ride.
- Wages aren’t increasing. Since the sharing economy doesn’t increase labor productivity, it will not contribute to aggregate higher wages. Pavilion’s Global Macro Research team found that the advent of the sharing economy has exacerbated the long downtrend in the ratio of labor income-to-GDP and the long uptrend in corporate profits-to-GDP, which is negative from the point of view of workers, but positive from equity owners’ perspectives.
Wages/GDP following a long downtrend, profits/GDP in a long uptrend
Source: Pavilion Global Markets Ltd.
The main beneficiaries from the sharing economy are consumers, who benefit from lower prices, and platform owners, who extract rents. However, since labor productivity isn’t improved necessarily, it is difficult to argue that the sharing economy also benefits workers. Perhaps there is an argument to be made in favor of the sharing economy helping ‘asset productivity’, in that it allows previously under-utilized assets (cars, apartments) to generate income. However, this tends to be at the expense of other assets (e.g. hotels, taxis).
This article was adapted from a Global Strategy research note dated October 8, 2015. The note carries the following disclaimer: This report was prepared for circulation to institutional and sophisticated investors only and without regard to any individual’s circumstances. This report is not to be construed as a solicitation, an offer, or an investment recommendation to buy, sell or hold any securities. Any returns discussed represent past performance and are not necessarily representative of future returns, which will vary. The opinions, information, estimates and projections, and any other material presented in this report are provided as of this date and are subject to change without notice. Some of the opinions, information, estimates and projections, and other material presented in this report may have been obtained from numerous sources and while we have made reasonable efforts to ensure that that the content is reliable, accurate and complete, we have not independently verified the content nor do we make any representation or warranty, express or implied, in respect thereof. We accept no liability for any errors or omissions which may be contained herein and accept no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. © 2015 Pavilion Global Markets Ltd. All rights reserved. This report may not be reproduced, distributed or copied, in whole or in part, in any form, without the written consent of Pavilion.
Pavilion Global Markets Ltd. is a CIPF member.