Which wage is wrong?

An interesting question arises from this new report- is it Uber’s wages which are wrong or the minimum wage itself? It has to be one of them after all, but which?

The report is pointing out that many Uber drivers aren’t making much money through the work. Well, OK, that’s their privilege we might think. Or we could insist that everyone’s labour should have some government approved value – that minimum wage argument. Quite how to decide between these two? How about look at what it is that people themselves want through their actions?

The vast majority of Uber and Lyft drivers are earning less than minimum wage and almost a third of them are actually losing money by driving, according to researchers at the Massachusetts Institute of Technology.

A working paper by Stephen M. Zoepf, Stella Chen, Paa Adu and Gonzalo Pozo at MIT’s Center for Energy and Environmental Policy Research says the median pretax profit earned from driving is $3.37 per hour after taking expenses into account. Seventy-four percent of drivers earn less than their state’s minimum wage, the researchers say.

Start by assuming that these numbers are correct. What is the lesson being learned from those facts, this paper?

Results indicate that profit from ride-hail driving
are very low. A Median driver generates $0.59 per mile
of driving, and incurs costs of $0.30 per mile. 30% of
drivers incur expenses exceeding their revenue, or
lose money for every mile they drive. (Figure 1) On an
hourly basis, the median profit is $3.37 per hour and
74% of drivers earn less than the minimum wage in the
state where they operate.

The minimum wage doesn’t apply to the self employed which is lucky really, for if it did no writer would ever get their start. But we can still usefully consider the lesson of this.

That lesson being that the minimum wage is too high. No, it isn’t that Uber’s fees are too low. For, given the free choice those drivers do have they’re doing the work for that money, aren’t they? Their revealed preference – that proof economists prefer of what people do, not what they say – is that they’re willing to do this work for that fee. It’s the government, with the minimum wage insisting that they not be allowed to sell their labour at such a low price, in the way here.

No, really, the minimum wage says you cannot sell your labour, as an employee at least, for less than $7.25 an hour. Yet here we’ve direct and compelling evidence that large numbers of people are willing to sell, or at least rent out, their labour for less than that. So, why is the government standing in their way?

The real lesson from this Uber study is that the minimum wage is too high. It prevents large numbers of people doing what they’d like to do, sell their labour for less than $7.25 an hour. We’ve the proof of this, large numbers of them are doing exactly that when they’re able to, as self-employed Uber drivers. So, lower, or a better solution abolish, the minimum wage so that the people are allowed to do as they wish. You’re not against freedom and liberty, are you?

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16 COMMENTS

  1. “30% of drivers are actually losing money once vehicle expenses are included.”

    I took an Uber this week. Cost about £7. 2 mile journey that took 10 minutes. It was 5 minutes away when it picked up, so call it 3 miles, 15 minutes in total. What’s Uber’s take? 30%? So, that’s £4.90. £5/gallon for petrol, say 20mpg in town traffic (at worst), let’s say 80p for petrol. That’s £4.10 for 15 minutes. Or about £16/hour. Even with a few other dedcutions, that’s far above UK minimum wage.

    I’m going to make an educated guess (the full report isn’t available for 6 months) that what they’ve done is used something like official taxable per/mile costs of a car, which firstly is based on fairly low mileage, and secondly, ignores people who’ve already sunk money into a car (and generally not new, but maybe a year old), like owning a big BMW and just do the occassional Uber shift (the car is about 3/4 of the cost).

  2. Is there a minimum wage job that doesn’t have fixed hours where you can take or leave each task as you wish?
    Where if you work hard and smart you can make more?

    If so, that would be a valid comparison. This, the quoted paper, is proving nothing beyond the headline it set out to get.

  3. David is onto something, that young Uber drivers are not aware of the full costs of running their business. But this is rectified in short order as the driver sees that there is no cash at the end of the month, at which time ceasing to drive for Uber will be another voluntary decision, whereas the government minimum wage will continue to be involuntary.

    This being a paper from “MIT’s Center for Energy and Environmental Policy Research,” the scholars certainly counted “social costs” though the driver doesn’t pay them and doesn’t care about them. These costs include polluting, clogging the roadways, and not using your life in a more socially beneficial way.

    Rhoda Klapp – Indeed there is an employment relation that you set out. It is called self-employed consulting. The power of the state is heavily arrayed against it; notoriously, to prove to the IRS that you are a consultant so that you can pay the employer’s share of payroll taxes as well as your own, you must already have two clients (other than Uber); that is, you must never be starting out. The government wants everyone safe and accounted for in a “job” and it does not care about the doing of work.

  4. Spike, yes I’ve done that. Although there is not the hour-by-hour freedom to take a task or not within a contract. My last job did not even involve a contract or any other formal terms. Not even a handshake, as I recall. For fifteen years, invoiced once a month. I dare say the government and the regulators think that…unthinkable.

  5. Two or three youngish Uber drivers over here that I’ve spoken to say that they do sufficient Uber work to pay for their (sometimes unfeasibly fancy) car, over and above their regular job. Only way their wives’ll let them have a smart set of wheels.

  6. Isn’t the whole point of the likes of Uber (and Airbnb) that you are using assets already paid for in alternative ways to derive additional revenue? Thus as the cost of the asset is already sunk the extra revenue is largely profit, once variable costs are taken into account? If you had to account for the cost of buying the car (or house) then neither Uber or Airbnb would make any financial sense, but as many people already have cars and houses that they aren’t fully utilising it makes sense to use them to generate some extra cash.

    • That is exactly right. Indeed the first Uber that I ever took was driven by the son of a taxi driver. His Dad owned the taxi and drove it for 8 hours as a taxi from 7am to 3pm; the son (a uni student) then took all the signage off and drove it as an Uber from 3pm to 10pm and handed it over to his brother who drove it as an Uber overnight.

      Which means that the asset is getting properly sweated rather than being under utilised; and the cost of driving for Uber was simply a marginal cost to the kids of fuel and maintenance.

  7. @Jim,

    OT What is the disease/problem with so many (5-10%) UK potatoes having holes/voids in them this winter?

    Prior to cooking they look and feel fine; after cooking shrunken with wrinkled skin and a void inside – border being yellow, brown or black.

  8. @Pcar: not my area of expertise, but I asked the question on the farming forum I’m on, and the general view is that its not a pest or disease, just what happens when a potato grows too fast, and a void forms inside. Impossible to grade out at the packing plant.

  9. Surely the elementary (probably deliberate) error here is counting expenses at all. That’s not how the minimum wage works, after all. Deduct the costs of commuting and buying uniforms from the minimum wage, and then you’d have a valid comparison.