The Real Cost of Uber

This is a response to a recent article on Bill Moyers’ website

Taxi drivers have always (well, for decades at least; and at most companies, though not all) been independent contractors, not employees. So the fact that Uber drivers are independent contractors paying a percentage to the person that really should be their employer is already standard practice in the taxi world. But in the taxi world, you probably pay ~70% of your fares (excluding tips), while Uber drivers are only paying 20% (possibly including tips­—I think it’s 20% of whatever is collected via the app, so cash tips would be excluded). That, right there, is what Uber tells people in order to woo them in the first place.

Also, both the taxi driver and the Uber driver are stuck with paying all their own taxes. You know that ~30% that is taken out of your paycheck before you even get it? Add another ~13%, because you’re responsible for the “employer’s portion” of Social Security and Medicare/Medicaid taxes. So if you actually want to compare what you make as an independent contractor (Uber driver or carpenter) vs being an employee, reduce the independent-contractor wage by a full eighth! $20/hr driving for Uber is equivalent to about $17.50/hr working for a legitimate employer. And if you’re making close to minimum wage, say, $8/hr, it’s more like $7/hr—and that’s before you figure in the regular taxes that everyone pays.

But for most taxi companies, if that were the whole story, it would definitely be better for the driver in both the short- and long-term. You’d be trading independent-contractor status and 30% cut for independent-contractor status and 80% cut. But that extra 50% that you pay the taxi company is paying for a *lot* more than the service that connects the driver to the rider. A typical taxi company owns and maintains the cars, some even pay for the gas. So you’re leasing use of a car, mechanic services, dispatching (to connect you with riders), and possibly fuel.

You’re also getting much better insurance coverage. Taxi companies are generally required to have top-tier insurance of all sorts: the driver, the vehicle, other vehicles, property, passengers, other people—all are covered about as well as auto insurance ever covers anyone. But with Uber, there are a number of limits/holes:

  • First of all, you’re only fully covered while you’re on the way to pick up a fare, or have a fare in. If you’re merely “on the clock”, you may or may not be covered—Uber and regulators and insurers are still arguing the details. And in most cases the coverage for damage to your vehicle only applies while you actually have a passenger in.
  • Second, that coverage, with the exception of Lyft, is secondary. So Uber’s insurance only applies if your regular insurance denies the claim, or it is maxed out. Take a guess how either of those situations are going to impact your personal insurance rates.

With a taxi company, you’re covered whenever you’re in the car legitimately (i.e., not if you swipe a taxi off the lot when you’re not supposed to be working).

Finally, taxi companies work to not only have enough cars on the road, but to not have too many. It’s a delicate balancing act, and I suspect most taxi companies fail at it most of the time, though perhaps only by a small margin (i.e., 13 taxis would be optimal, but they have 11 or 12 on the road). What Uber is trying to do is always have enough cars on the road so that a rider can always get a car in a short length of time. However, when the total number of riders per square mile is small, doing this requires more drivers per rider, and therefore fewer fares per driver. It’s choosing to optimize passenger experience at the cost of driver experience, rather than favoring drivers or trying to balance things so that both sides feel some of the hurt when the balance isn’t right.

So, to sum up: the Uber driver is paying an additional 13% of their income in taxes, and compared to driving for a taxi company, the Uber driver has to pay their own insurance, gas, & maintenance; probably has too many competing Uber drivers on the road; and has to tap their personal auto insurance first, before Uber’s will kick in.

Now, let’s look at what Uber is doing to passengers:

A taxi company has a lot of burdens on it, most of them for the sake of the passengers:

  • Background checks for all drivers. In at least some municipalities, that includes getting printed by the police and kept on file.
  • Fares usually regulated by the government. In practice, some municipalities pretty much rubber-stamp the taxi companies’ fare proposals, but that still means they can’t change them easily or quickly, and any demand-based pricing (like Uber’s “surge” pricing) has to be pre-approved in those regulations. And some municipalities aren’t so laid-back about it.
  • Very high insurance coverage requirements.
  • Required to serve the entire municipality or geographic area.
  • Required to operate 24/7.
  • Fairly high standards for the operating condition (if not appearance) of the vehicles, and regular and/or surprise inspections.

So, as a rider, you might get cheaper and/or faster service from Uber than from a taxi, but if you’re involved in an accident you may have harder time getting recompense.

Now the higher fares, so long as taxis continue to exist, are perhaps a reasonable tradeoff: you can have low price and wait a while for a taxi, or you can have fast service and pay extra for the privilege. But most places already have as many taxis on the road as the market can support, other than during special events (like NFL or college football games, or a big touring concert, or the like). So what rideshare companies are doing, long-term, is either taking a slice of a pie that has already been allocated (in the former case) or skimming the cream of the ride market that makes up for the less-lucrative rides, thus undermining the whole structure of most taxi services. IOW, those who can afford Uber will find it easier to get a ride, but it will likely make it harder for those who can only afford a taxi to get a ride (rather than freeing up taxi capacity, as Uber claims).

And let’s not forget that there is much less accountability of Uber drivers—Uber does a background check, but the drivers aren’t on file with the police.

Also in terms of safety, at least at the taxi companies I’m familiar with, the cars receive way more attention than I suspect most Uber drivers are going to devote. The taxis were checked daily, and maintenance performed as needed daily. I’m talking about a professional mechanic at a minimum checking the oil, doing a visual inspection of the engine and a walkaround of the car, and listening to how the engine runs.

But the biggest problem is related to that skimming of the market I alluded to before. In any given city, there are lucrative fares and non-lucrative fares. Some people ride long, some ride short. Some tip well, some don’t tip. Some are troublesome, some are pleasant. And there is often some correlation between these factors and where and when the riders are. I’m not just talking about neighborhoods: you quickly learn that passengers from one bar tend to come out happy and generous, while those coming out of another tend to be argumentative and prone to puking. And you learn specific passengers. But there’s also some definite correlation with the socioeconomic class of a neighborhood. So most cities have regulations requiring a taxi company to operate 24/7, and to serve all neighborhoods, because otherwise some neighborhoods wouldn’t get service. Uber isn’t abiding by these regulations, so if they succeed in driving the taxi companies out of business, then who’s going to drive into the poor neighborhood at 4 am to drive the housecleaner to work when her car dies? Right now, the taxi driver will happily—ok, grudgingly—go pick up that fare, knowing that in an hour he’ll have a shot at that lucrative business traveller going to the airport. But if those lucrative fares are all going to Uber, while Uber drivers aren’t touching the lousy fares, what happens when the taxi company folds?

Taxi companies aren’t just regulated for safety; they’re also regulated for society. Ridesharing companies are benefiting a small segment of society (those with enough money to pay more for a ride in order to save time, and who are perceived as lucrative passengers) at the cost of the drivers and poorer riders. The only way Uber’s model works without those costs is if there is a significant surplus of potential riders who are not using current options, and therefore Uber’s growth won’t decrease ridership of taxis, buses, trains, etc.

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