Uber wages and the Amway model

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A recent controversial study from the Massachusetts Institute of Technology [1] has asserted that Uber and Lyft drivers’ median wage is really just $3.37 per hour. I don’t want to wade here into the final number calculated by MIT, but I thought it might be useful to demonstrate that the techniques used by Uber and Lyft to keep the “real wage” low are a “feature, not a bug” of their business models. In fact, the business strategy has been successfully employed by the consumer products company Amway (now part of Alticor), since its founding in 1959 in my hometown in Michigan.

In short, the idea is to take asset investment, fixed costs and indirect costs, normally borne by the business entity, and shift those costs onto the laborers. Corporate cost accountants, after all, know how to value the impact of these costs on corporate profits, but most individual employees do not. Ignorance is bliss…for a while, anyway.

Besides their innovative multi-level pricing model, which has often skirted various state and national laws over the years, Amway learned that they could push a lot of corporate costs, which would normally burden the bottom line, onto the “self-employed” front-line revenue producers, the independent product sellers. These costs include (1) long-term asset investment, like automobiles, building costs for inventory storage/office space, minimum inventory levels and accounts receivable balances, (2) fixed costs, like insurance and utilities, and (3) other indirect costs like employee “idle time” and paperwork time.

Minimum inventory levels and accounts receivable balances are often not seen as long-term investment, but the dollar value represents capital that cannot be used elsewhere, and that tie-up of cash has an “opportunity cost” that can be substantial. Unproductive idle time and paperwork time, are hours spent NOT directly producing revenue. If you work a “normal job,” these hours are an expense to your employer, and you get paid for them.

The affect of fixed costs on reducing net revenues are notoriously hard even for cost accountants to accurately allocate, as I explained in a recent post on the costs of ambulances and drugs. These costs exist regardless of revenue level, so parceling them out accurately can be as much art as science if you don’t know what the revenue levels next year are going to be.

The psychological reality that Amway, and now Uber and Lyft, exploit is that the cost of that automobile depreciating, and the costs of insurance and maintenance on it, do not feel like they have an impact on my wage. Until, that is, I need to replace the car, and the cash to replace it is not there.

And I may not initially feel the lost revenue during all the hours when I am NOT selling or driving, at least initially. However recently, Uber has had to address the issue of drivers working extremely long hours trying to make a living. [2] These drivers have learned the cost impact of “idle time.”

Meanwhile, the rest of us, the customers, certainly have zero appreciation of all of these costs. We just want our product or service. As a country (and we are not alone here), we have yet to grapple with these “new” labor models, even though Amway has been turning over thousands of independent salespeople since 1959 as reality hits their pocketbooks one-by-one. Indeed, we have been moving steadily in the U. S. in an “anti-labor” direction for many years, with a major pending Supreme Court case on public union member rights likely to rule against labor, given the current makeup of the court (although I hope I am wrong, here).

While I don’t consider myself a Marxist, I do recognize the reality that Karl Marx was correct in predicting that too much aggregated corporate power would force ordinary people to compete for lower and lower wages. We do appear to be seeing this happen one industry at a time. Today it is the taxicab industry. Tomorrow it may well be whatever you do for a living.

Be prepared. Study Cost Accounting!


Notes:

  1. Levin, Sam. “Uber and Lyft Drivers’ Median Hourly Wage Is Just $3.37, Report Finds.” The Guardian, 1 Mar. 2018. The original study’s synopsis PDF is here.
  2. “Uber a Danger to Public Safety, Warns Union.” BBC News, 19 Dec. 2017.

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