From Innovation to Job Creation
On “Learning by Doing” by James Bessen
By Nicolas Colin (Co-Founder & Director) | The Family
France’s so-called ‘Grandguillaume Act’, which governs ride-hailing, keeps having its intended impact. Multiple obstacles are in place to block drivers classified as “LOTI” from participating in the previously-established VTC ride-hailing market. Lots of those drivers have thus gone back to their previous jobs: driving groups around at the request of large hotels or event organizers. And so, on the ride-hailing side of things, drivers are lacking, prices are rising, and there are fewer and fewer passengers.
Some out there applaud the fact that ride-hailing has gotten back to being “as expensive as a taxi” — and thus reserved for a privileged few, notably businesspeople. Few people realize that we’re missing out on a major change in urban transport, and similarly the creation of lots of jobs.
Economist James Bessen, author of Learning by Doing (Yale University Press, 2015), explains better than anyone else the dynamic that must be unleashed for technical progress to keep its greatest promises. At the beginning, innovation involves creating models that are still difficult to understand in order to resolve a long-standing problem. Innovators begin by fumbling around and resolving the problem at a smaller scale. At that point, they’re creating relatively few jobs. And that’s where we are with the ride-hailing market.
But then, as time passes, the offer that those innovators are proposing creates a bulge in demand. Clients start coming forward, more and more all the time, all wanting to use this new product that finally solves their problem. For ride-hailing, the problem is well-known: it’s impossible for most people to be transported from door-to-door at a reasonable price, particularly during rush hours.
At that point, the growing demand brings with it a wave of investments, which allow for productivity gains and the creation of an economic surplus. This surplus results in a lowering of prices that allows the product to serve an ever-larger market. It also allows, on the supply side, for an improvement in the quality of jobs in the sector, making them more attractive by augmenting worker pay and covering workers against risks such as old age and illness. This is exactly what happened at the beginning of the Fordist era: the innovation which was mass production allowed for the price of automobiles to come down, while also substantially raising the salaries of factory workers.
So how do we make up the difference between lower prices and higher wages in the ride-hailing sector? First through a volume effect. By increasing demand, which is itself driven by lower prices, we can lower the unit price of each ride while also increasing overall driver pay. The key is in reducing waiting times and minutes spent without passengers.
Most importantly, to get the best out of innovation, we must (as Bessen explains) change the terms of how supply meets demand. In the case of ride-hailing, we could authorize the use of smaller cars in order to diminish the fixed costs of the job. We could create new tolls to encourage individuals to be driven by professionals rather than use their own vehicles. We could subsidize shared trips to create lower costs per passenger. Manufacturers could design new vehicles adapted for door-to-door urban transport, for example following the model of London’s black cabs.
Nothing guarantees that any innovation will end up creating lots of jobs. We can, as with the Grandguillaume Act, decide that we want the status quo, that innovative products shall remain expensive and restricted to the richest among us. Or we can understand, as James Bessen does, that innovation is simply the first step toward a virtuous circle where the large-scale creation of quality jobs is necessarily linked to the democratization of the service — and thus to the updating of our rules.
(Originally published in Le Monde (in French), July 10, 2018.)
