Colombia: Rappi and the Benefits of Decreasing Labor Regulation

Colombia's first "unicorn" Rappi has provided jobs to thousands due to its ability to employ a strategy of flexibility in the labor market.

Rappi has become one of Colombia’s greatest economic success stories (Twitter).

Rappi is the first Colombian company to become a “unicorn”: that is a company that has raised more than USD $1 billion. In all Latin America there are only 11 “unicorns”.

The mobile app has different features that have made it a success. It is an innovative idea developed thanks to an easy-to-use platform. The objective is to connect people (users of the app) with products and services using technology and excellent delivery logistics.

Rappi is very attractive to the consumer because through the app it is possible to get almost anything: you can order at restaurants, pharmacies, request a locksmith service, or laundry, buy makeup or clothes, and even, if you do not have cash, you can pay directly with your credit card.

The idea is simply wonderful; however, the success of the app is due to another fundamental factor: delivery logistics that circumvent labor regulations.

The problems with a highly regulated labor market

For many years classical liberal economists have insisted on the harmful effects – both for employers and employees and the entire society – that regulations bring in the labor market.

The harder it is to fire, the more difficult it is to hire. If the labor regulations imposed by the government of the day require a company to pay a lot of money when a worker is dismissed, the employer will have to be very careful when hiring and employment opportunities will be lower, especially for the poorest.

If the employer could easily fire its employees, without getting into legal trouble for “unjustified dismissal” and without having to pay extremely expensive compensation, it could give the opportunity to work to people who do have less proven experience or credentials, but who could be very good workers.

The bureaucratic laws in the labor market are also responsible for many employees exploiting the situation, because they know that it would be very expensive for their boss to fire them. Recently a businessman told me that he can not fire one of his oldest employees – who has become useless – because the compensation he would have to pay is so high that it is cheaper to keep him, even when he does nothing, than to fire him.

In general, the lack of labor mobility is a loss for society as a whole. Companies would be much more productive with flexible labor regulations. More productive businesses means better and cheaper goods and services that benefit all consumers.

Labor regulation also pose other challenges: non-wage labor costs, such as bonuses, health, pensions, all that the company has to pay that is not direct remuneration, make the employer less likely to hire. Many people would be willing to work even if they did not pay all these benefits, but the state generally prohibits the employer from hiring someone without paying healthcare and pension.

The minimum wage – which we have analyzed in other articles – is also one of the main regulations that must be eliminated.

Rappi has managed to circumvent onerous labor regulations in Latin America

Thanks to its delivery logistics, Rappi managed to circumvent onerous regulation of the labor market, benefiting the whole of society, but especially thousands of people with limited resources, lacking in formal education and experience.

The workers of Rappi, who are responsible for delivering the order to the consumer made through the app, do not have a work contract with the company. They work in the style of Uber drivers.

The “rappitenderos” – as they are known in Spanish – log in to the app, look at the orders that users have made, and are free to choose to make the deliveries to the address they want. They do not have a fixed schedule, and can accept as many or as few orders as they want.

Rappi does not have to deal with everything that is implied in the formal hiring of a worker: there is no formal employment because the workers are not required to work certain schedules. The company is not required to pay severance payments, nor minimum wage, nor health, nor other obligations imposed by regulators.

Thus, they can give the opportunity to many people who, surely if there were no Rappi, would be unemployed or earning very little on the street.

In Colombia many rappitenderos are young Venezuelans who have neither formal education nor experience. In spite of that, at Rappi they have found work. To be a rappitendero you just have to learn how to use the application. Most rappitenderos make their deliveries on bicycles.

The company can give them the opportunity to work because if they do it wrong, they steal something, or they do not comply with an agreed order, they can easily be denied access to the platform without dealing with legal problems or compensation.

But in Colombia, and some other countries in the region, hiring a young man without studies, without certified experience and without references -like many Venezuelans who work in Rappi- would be impossible if the state forced employers to pay the minimum wage plus benefits and other non-salary costs.

As the creators of Rappi have repeatedly stated, if they were forced to pay minimum wage and social security, their company would not be viable and they would have to lay off many employees.

According to a young rappitendero recently interviewed by the Miami Herald, on a good day he can make 75,000 COP, or around USD $23, which means that he can earn double the Colombian minimum monthly salary.

The rappitenderos earn money for every delivery they make, those who make few homes earn little, and those who try harder earn more. This benefits the company, which does not have to deal with unproductive employees, who do not do anything because they know that their boss will not fire them, but it also benefits the consumer. There are companies similar to Rappi, but one of the constant complaints is that the deliveries take a long time. This is due to the fact that they do not have the same incentive system that Rappi has.

The faster you make the home, the more deliveries you can make, and the more money you will make. There is also a rating system; if the rappitendero takes a long time with deliveries, he will get a low rating, and eventually his access to the platform may be blocked. With a formal work contract everything would be different.

The freer the market, the more productivity and the less unemployment there will be

Rappi, the only Colombian “unicorn”, is the perfect example of what a company can achieve if it is not strangled by the regulations invented by politicians who know nothing about economics. But above all it is the example of how, the less regulations there are, the more jobs are created and even the less favored can be linked to the labor market.

That is why the most free countries, with the least regulations, are also the most prosperous countries.

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