We find that when Uber raises the base fare in a city, ... there is no detectable difference in the average hourly earnings rate compared to before the fare increase. With a higher fare, drivers earn more when driving passengers, and so how do drivers make the same amount per hour? The main reason is that driver utilization falls; drivers spend a smaller fraction of their working hours on trips with paying passengers when fares are higher.HT: MarginalRevolution.com
Friday, November 17, 2017
What happens if Uber raises driver wages?
ANSWER: Nothing, because driver supply increases which reduces the time spent driving for each driver.
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It is interesting to look at what happens when Uber raises fares and driver wages. It would make logical sense to imagine that this would mean that each Uber driver would make more money on average because they are getting paid more for providing a service much like when the government artificially raises wages through minimum wage increases. The reality is that long run equilibrium in a competitive industry (Froeb, McCann, Shor & Ward, 2016, Pg. 114) takes hold and people stop using the service, or in the case of raising the minimum wage decrease hours or eliminate employees.
ReplyDeleteTransportation is an incredibly competitive market. Consumers can select from providing their own transportation, using public transportation, calling a traditional cab, or using a direct competitor like Lyft. In upstate NY, all transportation is dealing with a supply shock (Froeb, McCann, Shor & Ward, 2016, Pg. 117). We recently gained access to Uber and Lyft. Before there was no set ride sharing service like this and therefore the competition was smaller for cab companies and public transportation. It will be interesting to see how the long run equilibrium works out once the novelty of ride sharing services wears off.
References
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics a problem-solving approach. Boston, MA: Cengage Learning.
Firms have many rivals and very close substitutes and is a competitive industry. Consumers can opt to not utilize Uber and choose another mode of transportation or forgo the trip all together. Therefore, it creates a decrease in demand. At a higher price, firms in the industry can earn above average profit- but only for a while called the short-run. (Froeb, et al) When demand is increased companies price often is also increased and above average profits can be earned. This may also increase interest in entering the industry so, supply increases. This leads to less business for individuals and profits fall back to average. Then a long run equilibrium is met. Wages also adjust to restore equilibrium. The indifference principle states that if an asset is mobile, then in long-run equilibrium, the asset will be indifferent about where it is used; that is, it will make the same profit no matter where it goes. (Froeb) Drivers will spend less time in business transactions therefore making the same amount as before.
ReplyDeleteThat is an excellent point that when demand increases so does price. In the instance of uBer they institute surge pricing at different times. For instance, New Years Eve at 2am was 5x the price or right when a sporting event lets out. When the Connor McGregor and Mayweather UFC match was over, uBer more than doubled its rate. Of course there are substitutes such as a cab or Lyft or the train or walking. However in thinking about substitutes, you also have to think about opportunity costs (what you give up to pursue an opportunity) (Froeb, et al p. 32). "Costs imply decision making rules and vice versa." (Froeb et al p. 32). The passenger needs to weigh the costs (both financial and other costs such as time). The passenger may not have the time to walk 40 blocks to an important meeting. The opportunity cost of getting to the meeting on time is far greater.
ReplyDeleteIf drivers earn more when the rate is higher, this can be considered an incentive. However, "incentive pay schemes typically expose workers to risk beyond their control" (Froeb et al p. 46). For example, if the rate becomes too high, consumers will seek alternative transportation (substitutes). Thus, creating less of a demand for the product, however the supply will be there (many drivers, with the potential to earn an increased wage, however the price is too high and passengers seek alternatives). Speaking from personal experience, I've waited an hour, sometimes two for the surge prices to go down. The opportunity cost of taking the uBer immediately was less than waiting it out for the price to go down....
For most of my life, taxi services have had a monopoly on livery service. If you needed a ride and didn’t want to take public transportation, you had one choice – call a taxi. We know from Froeb et al, 2016: “Monopolies produce a service with no close substitutes, have no rivals and barriers to entry prevent other firms from entering the industry.” (For the latter mostly because of government regulations.) Until last holiday season, they were the only game in town in Buffalo when you needed a ride home, to the airport, etc. Then there was Uber. Finally, now we had some competition. Shortly after that came Lyft. Even more availability and now we have a competitive industry. “A competitive industry produces a service with very close substitutes and demand is very elastic”. (Froeb, et al, 2016) With that being said it’s becoming very cut throat in Buffalo. Is it because Uber really raised driver wages? Similar to what happened in Orange County, CA, Uber forced pay cuts in an attempt to increase ridership. Uber said that to make up for it, it would guarantee driver wages in every city they cut pay rates for, depending when hours are at peak. However, drivers had to accept 90% of ride requests, do one trip per hour, and be online 50 of the 60 minutes to qualify. These changes are just some of the several fluctuations Uber drivers have dealt with in the past couple of years, all indicative of the company's goal to keep costs as low as possible to compete with other ridesharing companies like Lyft (and at the cost of the driver).” Now drivers are making more money, jobs are desirable and there are too many drivers between the three companies. “This increases industry supply, which leads to a decrease in price. Entry and capacity expansion continue, and the price keeps falling until firms in the industry are no longer earning above-average profit. When capital stops flowing into the industry, we are now at long-run equilibrium.” (Froeb, et al, 2016) The really amazing element in this study is that this all happened in one year! Probably because we’re considered a small market.
ReplyDeleteReferences:
Froeb, L., McCann, B., Shor, M., Ward, M., 2016. Managerial Economics A Problem Solving Approach, Boston, MA. Cengage
Hoang, K. , May 29, 2015. Uber Raises its Pay Rates for OC Drivers, Drivers Still Feel Cheated Retrieved 12/13/17 from :http://www.ocweekly.com/news/uber-raises-its-pay-rates-for-oc-drivers- drivers-still-feel-cheated-6446028
With an increase for Uber drivers, that could possibly mean that the company may cut down some of the drivers. This is a controllable factor for the company. This is something that affects demand that a company can control. In this case it would be the price. Since wages are raised, that means the fare is going up as well. Since the fare is going up, passengers can look for alternate means of transportation such as taking a bus, using their own vehicle or even going to the competition if its cheaper. (Lyft). Other side of this is the substitute price can increase. “If the price of a substitute product increases, then industry demand for a product will increase." (Froeb, 97).
ReplyDeleteUber actually just came out with a new system several months ago which has angered many of their drivers. Under the new system, in place in 14 major markets, driver pay is no longer directly tied to how much passengers pay. Instead, Uber can increase fares based on factors like destination and time of day, but still only pay drivers based on mileage and time spent on individual rides. (Fortune, 2017). The new pricing system does also sometimes charge riders less than the standard fare, particularly for UberPool, while keeping driver pay the same. This would be similar to indirect price discrimination.
This is also directly related to supply and demand. If Uber were to raise its wages, it would attract more employees meaning that the supply of drivers increases. As supply increases, demand decreases, as explained above in saying that each driver’s driving time also decreases. Sure, they get a higher hourly wage but that makes no difference when their driving time does not also increase. “Once equilibrium is reached, differences in wages, called compensating wage differentials, reflect differences in the inherent attractiveness of various professions” (Froeb, 2016, p. 116). Uber is a very attractive profession because employees can work when they want to, and can mostly control their income. This also further supports the idea that if Uber were to raise their hourly wage, it would make no difference on earning potential. This would only make Uber even more attractive for more potential employees to enter the market. Where it may make sense to increase wages would be in unattractive markets. For example, dangerous or rural areas could have the potential for employees to make more money. Of course, there is more risk involved in driver safety, insurance costs, etc. This would have to be at the driver’s own expense, otherwise Uber would be at risk. Taking those considerations into account, even if the driver made more money, it may not be worth the money due to the risk.
ReplyDeleteReference:
Froeb, L.M., Mikhael, S., McCann, B.T. & Ward, M.R. (2016). Managerial Economics: A
problem solving approach, 4th edition. Boston, MA: Cengage.
In the Froeb text, we learn about a concept of Equilibrium and how once its found, different wages in the company or industry will show the various good and bad traits of that specific job or field.
ReplyDeleteWhile if Uber raised it wages, it would increase wages and most likely decrease demand, raising it's wages wouldn't solve the task at hand which is the drivers feeling more apt to drive for more profit.
In my area of the Capital District in NY, Ride Sharing just came to the area in June. Driver's are making a lot driving with Uber now, especially during areas hosting events because there's not many drivers. This leads to high demand and a low supply, and when this occurs with Ride Sharing, rates enter a "surge price;" where rates can be up to 5x higher than the regular fares because of everyone needing rides and the low amount of people driving. What could be only a normally 7-10 dollar earning on a few mile ride, could be close to 50 or 60 dollars during higher surge prices. The key to surge pricing is high demand for rides with a low supply of drivers.
Once they increase wages, people initially will see this as a good thing and more and more people to sign up for Uber or Lyft. This will mean they're wont be a shortage of drivers to meet the high demand for rides, therefore not creating surge prices (where the big monies are earned) because they're will be enough drivers to meet the demand. Which, in the long run, will decrease earnings for drivers.