If gig economy initiative fails, will you pay more for Uber and Lyft? What studies say
Gig companies present a black-and-white message to their users: If Proposition 22 fails, they will have to pay more and wait longer for a ride or a delivery order.
Uber, Lyft and other companies such as Instacart have spent more than $180 million to push their messaging on Prop. 22, which would exempt them from a new California labor law that requires businesses to provide employment benefits to more workers rather than allow them to hire independent contractors.
The campaign is spreading its message right where it wants: On the companies’ apps.
“Keep Uber affordable,” Uber says in its app, directing people to the Yes on Prop. 22 campaign website. “Prices will increase if Prop. 22 doesn’t pass.”
“Passing Prop. 22 is a win-win,” Lyft says in its app. “It will give drivers historic new benefits and protections, and keep Lyft affordable for riders.”
If Prop. 22 fails, gig companies will be on the hook to give drivers a slew of benefits, including unemployment insurance, paid sick leave and minimum wage for all hours worked. Neither side denies that the companies will have to pay for those benefits, and that they will pass at least some of those charge to the consumers.
What’s in dispute is how much. Yes on Prop. 22 and gig companies say converting drivers to employees can increase prices by 25% to more than 100% in some parts of the state, with more rural areas burdened with a steeper fare hike. But researchers at UC Berkeley Labor Center disagree, saying the companies may only need to increase fares by 5 to 10%.
Here’s how each side came to its conclusion:
Passing costs on to customers
A recent study from the consulting firm Berkeley Research Group says the cost of ride share will go up anywhere from 25.9% to 100% in California if drivers become employees. Uber economist Alison Stein made a similar point in a May blog post, saying prices will increase 25% to 111% to cover increased costs.
Bill Hamm at the Berkeley Research Group said the firm assumed the companies will pass most, if not all, of the increased costs to their consumers. Hamm noted the companies are not profitable, with Uber losing nearly $2 billion in the second quarter of 2020.
Hamm says his study’s conclusion is conservative because it doesn’t account for the companies’ cost of hiring supervisors to oversee employees or of conducting periodic training programs for workers.
And with the increase in costs, people probably will use the services less frequently, creating a spiral that causes even more fare hikes, Hamm said.
Prices in areas such as San Francisco or Los Angeles may not go up as much, because they will still have enough demand for rides. But areas such as Fresno, Modesto or Southern California’s Inland Empire with less demand may not be as lucky, Stein said.
In more rural parts of the state, so few drivers and users may be left that companies may decide to pull out of those areas entirely, Hamm said.
Options to keep prices down
A study from Michael Reich at UC Berkeley came to a different conclusion: Fare increases can be limited to 5% to 10% if companies treat drivers as employees.
“The result would be a modest increase in fares, a small decline in demand, a small increase in company revenues, and a one-third increase in total driver compensation,” Reich said in the study.
Companies will increase how much they’re paying their drivers by about 30%, Reich said. But he argued the companies can absorb a lot of those costs by using drivers more efficiently.
More than 30% of drivers’ time now is spent waiting for a ride, Reich said. Companies can minimize that waiting time by limiting the number of new drivers. Companies can also restrict the number of drivers on the app at a given time, like they do in New York City, he said.
Companies will also save money because they won’t have to pay for screening and onboarding as many new drivers as they have done so far, Reich said.
Reich sees rooms for companies to reduce how much they take from their drivers, typically set at about 25%, on fares. For instance, Uber has said it could be profitable by 2021, as it focuses less on growing its operations. Reich noted Uber spent nearly $2.5 billion to create a self-driving car, to little success thus far.
“They are making money, and they are making a big mark-up over their costs when they charge 25%,” Reich said of the companies.
What can New York tell us?
New York City was the first in the nation to require companies such as Uber and Lyft to pay their drivers at least minimum wage after expense for all hours worked, which equated to at least $27.86 per hour in 2019.
Following the implementation of the requirement in 2019, companies raised prices, although they declined to say how much. The number of rides in the city went down by 8% from March 2019 to May 2019, according to an analysis of the city’s Taxi and Limousine Commission data by Bloomberg.
Uber has said the city’s regulation hurt lowest-income New Yorkers, citing the internal data that showed the growth of trips slowed drastically in some of the poorest areas following the rule’s implementation.
Still, Reich said he doesn’t believe the pace of the fare increases has been significantly different from those in cities such as Chicago. Data collected by New York City also shows that the number of trips had rebounded to the pre-March 2019 level by February 2020.
Moira Muntz, a spokeswoman at the Independent Drivers Guild representing Uber and Lyft drivers in the city, said drivers are frustrated by what Uber and Lyft have done to limit their access to the app. Some have resorted to sleeping in their cars, so they can get into the apps when they are allowed to.
Lyft has said it saw a 10,000 reduction in total active drivers in New York City after the wage law took effect, largely due to a loss in scheduling flexibility.
But ultimately, Muntz said she believes the city’s regulations made a positive difference in the drivers’ lives.
“Overall, driver pay has increased by nearly a billion dollars a year,” she said. “There’s no doubt having the minimum pay made a big difference in tens of thousands of families in New York.”
Seattle has recently joined New York City in requiring the companies to pay their drivers at least minimum wage. In a few weeks, California voters will determine whether the state will join cities such as New York and Seattle.
This story was originally published October 14, 2020 at 5:00 AM with the headline "If gig economy initiative fails, will you pay more for Uber and Lyft? What studies say."
