Marketplace Startups and Income Inequality

Entrepreneurial freedom or a race to the bottom?

The wealth created in the tech industry over the last decade in contrast to growing income inequality nationally is pulling the “tech elite” into the gun sights of journalists and activists, and the trend is unlikely to fade as the loss of well-paying working class jobs takes center stage in political debate.

But unlike the historic tension over automation that eliminates manufacturing jobs, much of the recent focus has been on popular consumer-facing marketplace apps. Rather than lumping all these platforms together, it’s important to recognize that there are two different types of marketplace startups— Open Marketplaces and Standardized Marketplaces — and the difference between them matters a lot from a labor perspective.

Open Marketplaces empower labor.

These platforms put the people who need a product or service and the people who can provide such a product or service in the same place, then let them figure pricing out between themselves (with tools like ratings to help make that easier). Harkening back to the early days of eBay, these constitute most online marketplaces from the Dot Com era onward. They create a free market — governed with set rules and consumer protections — and leave the fate of each service provider / seller up to their own talent. It creates more transparency in the market for all involved, allowing those who perform well to thrive and giving a kick in the ass to those who aren’t performing well.

In open marketplaces like ODesk, TaskRabbit, Etsy, Airbnb, DogVacay, and UpCounsel, the labor side — whether they are selling their goods or their services — is empowered. There’s real entrepreneurial opportunity and responsibility. It becomes easier to thrive independently without working for someone else’s firm, but firms can also make use of them to compete for customers (they’ll need to incentivize their employees with a reason to stay rather than go independent though, which is a positive pressure).

Those individuals and firms with the most talent and commitment end up doing better than they otherwise would have — being able to charge more, receiving constant work, and building their brand. Those who don’t deliver quality are pushed to the bottom by the competition — they can still get customers but it’ll be much harder and they have to price their services lower. This is a more efficient incarnation of how business has always been done.

Open Marketplaces have no incentive to drive down the earnings of the labor side — they benefit from hosting the full spectrum of transactions (for cheap/mediocre labor to expensive/exceptional labor) and usually get a percentage cut. Since they host the entire market on their platform, open marketplaces can achieve a monopoly that leaves no room for competitors based on price point.

Standardized Marketplaces have the net effect of crushing labor.

This alternative model of marketplace has been especially popular during this past consumer internet wave: marketplaces that don’t feel like marketplaces to consumers because they offer one standardized, fixed-price point service that is under their brand. Think Uber, Lyft, Handy, Postmates, etc.

All the users on the labor side work for the same pay (or roughly the same pay). It’s commodity labor where differences in skill, performance, etc. are irrelevant. Someone is either above the bar that the marketplace sets and allowed in the labor pool, or they fall below the bar and are kicked out of it altogether. Customers don’t pick out their preferred driver or house cleaner, they just press a button.

It seems like a subtle difference in model from a consumer and tech industry standpoint, but these two look radically different on the labor side. Marketplaces that highly standardize the service provided, not allowing for much (if any) flexibility in service quality and corresponding pricing create a ceiling on worker earnings.

These tech companies are playing an active role in the market, using the aggregated demand on the customer side of their marketplace as bargaining power to drive down all workers’ earning potential. They’re offering a standardized service at one standardized price-point to customers, which opens them up to competition by another tech company at a lower price-point. They’re thus incentivized to drive down pricing continuously lower and lower, and to drive down workers’ earnings at the same rate in order to maintain their profit margins.

There’s no reward in standardized marketplaces for outperforming the basic service level. What maintains minimum quality standards isn’t growth opportunities but the constant threat that a couple low ratings by strangers will get you fired (an extremely stressful condition to work under that creates a master-servant dynamic between customers and labor). Management of workers isn’t done by fellow workers in an organization, it’s done by algorithms. This means the downsides of no job security, no minimum hours/pay, high stress, and no benefits are matched with no growth opportunities.

The standardized marketplace model shouldn’t, and won’t, disappear — it creates a valuable efficiency in the economy over the long-term — but it’s important for policymakers to make decisions on how to regulate it and how to handle the impact it’s having on the labor force.