In TNC wage war, econ 101 is on the driver’s side

Hold on tight, passengers, it’s gonna be a bumpy ride

We frequently read and hear that ride-hailing companies like Uber and Lyft are money-losers and are unlikely to be profitable in the near future. However, given that both companies are trading on public markets with a combined worth of more than $80 billion, investors must be thinking they will reach profitability at some point. The question is whether this profit will come from higher prices charged to passengers, or lower wages given to drivers.

In a recent New York Times Upshot piece, Austan Goolsbee, a well-known economist and former adviser to President Barack Obama, makes the case that, in this scenario, passengers will be footing the bill. Goolsbee substantiates his claim in a way that those of his of economics-trained ilk know how to best--via the theory of "relative price sensitivity."

Economic theory predicts that those who are more sensitive to prices changes will pay less, while those who are less price sensitive will pay more. Studies have shown that, while drivers are price (wage) sensitive, passengers really aren’t. A comprehensive study on the effects of so-called “surge pricing” found that passengers didn’t change their behavior much when prices shot up. It found that, for every 10 percent increase in price, demand fell by only about 5 percent. I don’t know about you, but this finding didn’t surprise me. When I want to ride-hail, I WANT TO ride hail. A few dollars extra won’t deter me.

Drivers, on the other hand, ARE deterred by lower prices, and, conversely, encouraged by higher prices. They are what economists call “elastic” to price changes. I won’t get into too much economic detail on why this is (hint: it’s related to the “market rate” of average wages and “the outside option”). Suffice to say, this is generally good news for drivers, as it means TNC companies can’t really drop wages much lower for drivers, or else the companies risk losing those drivers to other jobs that offer average pay (which would be slightly higher than what the TNCs would be offering).

Given the discussion going on in California about potential laws to ensure “fair” wages for drivers, I wonder whether state regulators have considered this economics-driven argument. If the price is indeed right for drivers in the TNC employee vs. contractor debate, maybe the state ought to think about taking a back seat on this one for a little while.