I recently read some news that in the month of July 2022, the number of air passengers fell by 11%. (The numbers fell, not the passengers.) And most of it was attributed to surge in ticket prices.

So when prices go up, why does the demand go down? When the prices go up, the customers would ask themselves if their travel is really necessary and could they find an alternative like going by road or taking the train or meeting over Zoom instead of actually travelling by air? Some people will take the alternative, 11% to be precise, while the other 89% would still prefer to take to air.

And what would happen if the prices went up further? More people among the 89% would probably find alternatives than take to air and so the numbers are likely to fall further. On the other hand, what would happen if prices fell? Well, people that were looking for alternatives or even those not looking to fly will now consider flying and so the number of passengers (and the passengers in planes) would go up.

So, you can see there is a correlation between prices of air tickets and the demand for flying. Higher the price, lower the demand. And lower the prices, higher the demand.

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I have been using Blinkit for about 4 months now. About a month ago, I noticed that their delivery prices went up from Rs 10 to Rs 29. Suddenly whatever I wanted to buy didn’t seem so urgent. So I put off my buying. Its very likely that like me, more people were also put off and hence they too put off their buying. So, the demand for Blinkit must’ve fallen as the prices went up.

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Are you with me so far? Pay attention, because I am going to make this hard now.

Now, based on the above two examples, tell me, would the demand for Zomato go up or go down if the delivery prices are increased? If you don’t know- ask if you are willing to pay more for the delivery of the same pasta from the same restaurant? Last week, delivery costed you Rs 50 for a Rs 300 pasta, now it will cost you Rs 75 for the same Rs 300 pasta. Would you buy it? Maybe yes, maybe no. If you said yes, is your pasta consumption via Zomato delivery over a year likely to go up, remain the same or likely to go down? Did the price of delivery have anything to do with your decision?

Well, irrespective of how you answered in particular, it is likely that the pasta consumption via Zomato delivery is likely to go down for the economy as a whole, as delivery prices go up. People may cook more or go to a restaurant and consume pasta, neighbors may pool their pasta orders etc. all of which would lead to the cumulative number of orders on Zomato going down. And it is because of higher prices.

Now, let me ask a tough question. If you offer health benefits and insurance and other perks, wouldn’t they add to the costs of delivery for Zomato. I don’t know Deepinder Goyal personally, but I think he is not that nice a guy who will pay for these costs from his own pocket. He is likely to pass them on to consumers in the form of higher delivery prices. And we just kind of concluded that higher delivery prices is likely to reduce the demand.

So tell me, would Zomato hire more gig workers or less if there are lesser number of orders? Less.

But from the point of view of the gig workers, aren’t more jobs better? If you are a banker, would you like there to be more banking jobs or lesser? I am guessing you want more because if you don’t like one, you could move to another. If you are a software engineer, you would want more potential employers. And so I think, gig workers will want more jobs because the pay would be better if there are more jobs.

Also, the gig worker is also as rational as you and I. He or she chose to work at Zomato because the pay here was better than the alternative options, right?

So adding all those perks are going to lead to higher delivery prices which will lead to lesser number of orders which lead to lesser jobs for gig workers which mean lesser choices for them. So did you help the gig workers or harm them by doing so? I told you, it’s going to get tough.

Yes, without a doubt, I want them to have the same perks as everybody and that they should lead a life of dignity. But, you and I are going to consume less if the prices are higher and those perks are going to increase prices. And that will harm them in the long run.

This reminds me of a passage from Psychology of Money, by Morgan Housel:

A few years ago, The New York Times did a story on the working conditions of Foxconn, the massive Taiwanese electronics manufacturer. The conditions are often atrocious. Readers were rightly upset. But a fascinating response to the story came from the nephew of a Chinese worker, who wrote in the comment section:

My aunt worked several years in what Americans call “sweat shops.” It was hard work. Long hours, “small” wage, “poor” working conditions. Do you know what my aunt did before she worked in one of these factories? She was a prostitute. The idea of working in a “sweat shop” compared to that old lifestyle is an improvement, in my opinion. I know that my aunt would rather be “exploited” by an evil capitalist boss for a couple of dollars than have her body be exploited by several men for pennies.

-Psychology of Money, by Morgan Housel

I will add, that Morgan Housel was talking about perspectives of those on the outside vs those on the inside. He wasn’t talking of Economics at all. But the example is pertinent. More jobs in the economy is good for the economy because people at all levels will then have choices and they can decide where to work or not work, whom to work for or not work for etc.

Try as much as we want, you and I cannot solve all the problems. We have to pick our battles wisely and be willing to let go of the others. Yes, we can increase benefits to the gig workers. That solution will create other problems. So for example, if delivery prices go up, customers will order less. Therefore you may choose to subsidize the customers by forcing the shareholders of these companies to absorb the increased costs. These would lead to lower returns for those investors and hence there will be lesser investments into such sectors in future thereby creating lesser jobs in the future. Politicians can claim victory because everyone can see the benefits the gig workers got, but nobody can see the destruction of the jobs that could have been created. People who could’ve had a factory job or gigs may now be pushed to into more menial jobs like prostitution.

What would make low-wage workers worse off would be foreclosing one of their already limited options. This is especially harmful when considering that low-wage workers are often young, entry-level workers for whom work experience can be more valuable in the long run than the immediate pay itself.

Basic Economics, Thomas Sowell

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Many years ago, I was sent on a project to the USA. The “benefits” were so pathetic that I felt exploited. I was way better off than Zomato’s delivery boys and girls, but yet I felt exploited. Looking back, I feel like telling my younger self that in a capitalistic structure there will be times when organizations will maximize profits than worrying about your exploitation. If you feel exploited, work on improving your skills and move on rather than trying to change the organization’s behavior. So I would hope that the delivery boys and girls are more loyal to their own long term interests than to their paymasters.

Cheers!

PS: My friend gifted Basic Economics to me and reading that book has changed my perspectives. Your takeaway from that should be to read the book and not on waiting to see if a friend gifts you the book. 🙂

PPS: No interest in Zomato or any other such companies in the gig economy. Just applying what I am reading to the world around.