Rideshares: A literature review

Last week, Uber and Lyft, true to their word, announced that they would stop operating in Minneapolis after the City Council passed an ordinance hiking driver pay. The growth of Uber — Lyft, for some reason, hasn’t attracted the same attention — prompted a number of empirical investigations by economists. What do these papers indicate that we can expect from the Minneapolis fiasco?

Reduced worker welfare

The City Council saw the problem as wages which were “too low.” But the nominal wage is not the only element of compensation, or the only thing that attracts — or repels — someone to a particular job. You might want a flexible work schedule and be willing to choose a wage of, say, $10 an hour over a wage of $12 an hour if the $10 job offers you flexibility and the $12 one doesn’t. As I wrote in 2022:

Sure, the gig economy comes with its own expenses, like drivers using their own cars or paying for their own gas. But it also comes with benefits that are nonexistent in traditional employment. Chief among these benefits is the flexibility for gig workers to set their own hours.

Whether gig workers like it or not, they face a tradeoff, with no perfect solution. They can either accept the flexibility that comes with the gig economy — together with the expenses and risk — or they can look for regular employment, which comes with no flexibility but has an added safety net.

This was based on a couple of pieces of research. “Using both survey and administrative data,” economists Jonathan V. Hall and Alan B. Krueger, in a 2016 paper, found that:

Drivers appear to be attracted to the Uber platform largely because of the flexibility it offers, the level of compensation, and the fact that earnings per hour do not vary much based on the number of hours worked. 

In a 2019 paper for the National Bureau of Economic Research (NBER), economists M. Keith Chen, Judith A. Chevalier, Peter E. Rossi and Emily Oehlsen found that:

…while the Uber relationship may have other drawbacks, Uber drivers benefit significantly from real-time flexibility, earning more than twice the surplus they would in less flexible arrangements. If required to supply labor inflexibly at prevailing wages, they would also reduce the hours they supply by more than two-thirds.

Hall and Kruger’s paper was also revealing of the type of people who drove for Uber. They found that:

Uber’s driver-partners are more similar in terms of their age and education to the general workforce than to taxi drivers and chauffeurs. Most of Uber’s driver-partners had full- or part-time employment before joining Uber, and many continue in those positions after starting to drive with the Uber platform, which makes the flexibility to set their own hours especially valuable. Drivers often cite the desire to smooth fluctuations in their income as one of their reasons for partnering with Uber.

It was primarily a ‘side hustle,’ Uber did not promise that you’d be able to support a family of four in a suburban house with your earnings.

So, thanks to Minneapolis City Council, not only have the city’s rideshare drivers not seen their pay increase, they have lost their nominal wage and the flexibility element of their overall compensation. It is easy to see why so many drivers were against this measure.

Less efficient transport

In the short term, the main beneficiaries of the City Council’s actions will be the city’s cab drivers who have just seen their main competition disappear. What will this mean?

In a 2016 paper, economists Judd Cramer and Alan B. Krueger “examine[d] the efficiency of ride sharing services vis-a-vis taxis” and found that:

In most cities with data available, UberX drivers spend a significantly higher fraction of their time, and drive a substantially higher share of miles, with a passenger in their car than do taxi drivers.

They attributed this, in an earlier draft for the NBER, to:

1) Uber’s more efficient driver-passenger matching technology; 2) the larger scale of Uber than taxi companies; 3) inefficient taxi regulations; and 4) Uber’s flexible labor supply model and surge pricing more closely match supply with demand throughout the day.

A 2021 paper by economists Meng Liu, Erik Brynjolfsson, and Jason Dowlatabadi asked how services like Uber, with their “real-time monitoring, ratings of buyers and sellers, and low-cost complaint channels…affect moral hazard and service quality?” They compared “driver routing choices and efficiency on a large digital platform, Uber, with traditional taxis” and found that:

(1) taxi drivers route longer in distance than matched Uber drivers on metered airport routes by an average of 8%, with nonlocal passengers on airport routes experiencing even longer routing; (2) no such long routing is found for short trips in dense markets (e.g., within-Manhattan trips) or airport trips with a flat fare; and (3) long routing in general leads to longer travel time, instead of saving passengers time. These findings are consistent with digital platform designs reducing driver moral hazard, but not with competing explanations such as driver selection or differences in driver navigation technologies.

So, taxis are utilized less intensively than Ubers and gouge customers more. The shift from Uber to taxis, then, can be expected to lead to less efficiency in transportation.

Lower consumer surplus

This last point suggests that consumers will be worse off. A 2016 paper by economists Peter Cohen, Robert Hahn, Jonathan Hall, Steven Levitt, and Robert Metcalfe estimates the consumer surplus — the amount consumers would pay above what they actually do pay — and finds that:

…in 2015 the UberX service generated about $2.9 billion in consumer surplus in the four U.S. cities included in our analysis. For each dollar spent by consumers, about $1.60 of consumer surplus is generated. Back-of-the-envelope calculations suggest that the overall consumer surplus generated by the UberX service in the United States in 2015 was $6.8 billion.

This consumer surplus is likely to be much lower if substitutes like taxis are used or if the journey simply does not take place at all.

Putting it all together

Looking back over this body of empirical research, we see that the likely consequences of Minneapolis City Council chasing Uber and Lyft out of the city are likely to be reduced welfare for the drivers themselves and customers, but some benefits for the city’s cab drivers. These might not have been the intended consequences, but they are likely to be consequences all the same.