Labor Welfare in On-Demand Service Platforms

Problem Definition: An on-demand service platform relies on independent workers (agents) who decide how much time, if any, to devote to the platform. Some labor advocates have argued that an expansion of the labor pool hurts agents—by reducing the wage and agent utilization (i.e., the fraction of time an agent is busy serving customers). Motivated by concern for agent welfare, regulators are considering measures that reduce the labor pool size or that impose a floor on the nominal wage or effective wage (i.e., the product of the nominal wage and agent utilization). Are agents indeed hurt by an expansion in the labor pool size? Which type of wage-floor regulation is preferable? Are consumers hurt by the imposition of a wage floor? Academic/Practical Relevance: Because independent agents work without the traditional protections intended to ensure the welfare of employees, the welfare of those agents is an important concern. Methodology: We employ an equilibrium model that accounts for the interaction among price, wage, labor supply, customer delay and demand.Results: Average labor welfare increases and then decreases in the labor pool size. That is, agents are harmed by an expansion in the labor pool size if and only if the labor pool size is sufficiently large. The effective wage floor is superior to the nominal wage floor in terms of labor-welfare maximization. More generally, the two types of wage floors have structurally different effects on labor welfare, with a floor on the nominal wage only beneficial to agents if it is sufficiently small. Contrary to the view that consumers are hurt by an effective wage floor (because they face a higher price—due to upward pressure on the wage—and longer delay—due to upward pressure on agent utilization), consumers actually benefit. Managerial Implications: Regulators, labor advocates, platform managers and agents benefit from understanding the forces that create and destroy labor welfare.