Uber/Lyft vs. the Minneapolis City Council

Uber/Lyft vs. the Minneapolis City Council

Uber/Lyft vs. the Minneapolis City Council

The Minneapolis City Council voted back on March 7 to require that ride-sharing firms like Uber and Lyft needed to increase the pay received by their drivers.

Uber and Lyft both responded by saying that they would stop travelling to or from locations in the city of Minneapolis; Uber said that it would leave the state of Minnesota altogether, while Lyft said that it would continue to serve non-Minneapolis destinations in the broader metro area.

My extended family and I live in suburbs that border Minneapolis, and one of my adult children lives in Minneapolis. The ride-share services are mostly a convenience for us, but one of my adult children has a disability and it’s a transportation lifeline for him. Thus, I do have a personal stake in this issue.

(For those not familiar with this area, the population of the broader Minneapolis-St. Paul-Bloomington metro area is about 3.6 million. The population of the city of Minneapolis is about 425,000. However, a number of office buildings as well as destinations like theaters, sport venues, and shopping are within the Minneapolis city limits.)

A complexity in this dispute is that Uber and Lyft drivers are not paid by the hour: they are only paid when actually transporting fares. Their pay is determined by a combination of a fee per mile travelled and a fee per minute of driving. Thus, part of the controversy is over what mixture of per-mile and per-minute fees would assure that drivers receive the minimum hourly wage.

The Minneapolis City Council voted on March 7 for Uber and Lyft drivers to be paid 51 cents per minute and $1.40 per mile. Before the vote, the mayor of Minneapolis pointed out that the state Department of Labor and Industry (run by a sympathetic Democratic governor) was scheduled to publish a study literally the next morning with estimates of what mixture of fees would be needed to assure drivers a minimum wage, and asked that the Minneapolis City Council wait for those numbers. But waiting an entire day for data is not a skill possessed by the council, so it went ahead and voted.

The state report on “Transportation Network Company Driver Earnings Analysis and Pay Standard Options” (March 8, 2024) came out the next day. The “study analyzed extensive data provided by Uber and Lyft about more than 18 million Minnesota transportation network company (TNC) trips and driver earnings for all of 2022, and the results of a survey completed by 1,827 Minnesota drivers.” The report determined that the appropriate mix of fees so that the drivers would make minimum wage would be $0.89 per mile and $0.49 per minute.  

The Minnesota state study noted that “a third of all drivers provided more than two-thirds (69 percent) of all trips,” and focused on the situation of those drivers, who drive more than 20 hours per week. It broke down the time of drivers into three categories: “Period 1 or “P1” is the time drivers are logged into the app and waiting to accept a ride; period 2 or “P2” is the time drivers are enroute to pick up a passenger; period 3 or “P3” is the time when a driver is transporting a passenger from the pickup location to the drop off location. For purposes of this report, the sum of P1, P2 and P3 equals the driver’s total working hours.”

Obviously, the hourly compensation for driving will differ depending on which time category you use. Also, it will differ according to what is included in estimates of vehicle costs and other expenses. The report states:

The analysis of company data indicates that gross hourly earnings per passenger time (P3) for drivers in the seven-county Twin Cities metro area averaged $52.94 in 2022. But drivers had a passenger in the car only 58 percent of the time they were logged into the app and available for a dispatch. As a result, average gross hourly earnings per working hour (P1 + P2 + P3) are 42 percent smaller: $30.27. After factoring in expenses for total miles driven during working time, average net hourly earnings were even smaller: $14.48 (or 27 percent, of gross hourly earnings based on passenger time). … Those amounts are averages; some drivers earn less, some earn more. … Twenty-five percent of drivers had net, after-expense hourly earnings of $10.54 or less, and 25 percent of drivers had net after-expense hourly earnings of $17.51 or more.

The TNC [Transportation Network Company] pay standard options include two components: a per minute component to compensate for the driver’s time, and a per mile component to compensate for vehicle and other necessary expenses, and as explained below, to cover the cost of possible common workplace benefits. … The Minnesota per minute rate is designed to compensate drivers at the equivalent of the minimum wage, plus the employer share of federal Social Security and Medicare payroll tax … The Minnesota base per mile rate provides for the 63.8 cents per mile cost of acquiring, operating, and maintaining a vehicle based on Minnesota-specific costs from early 2024. The respective per minute and per mile pay standard components are applied to the time and distance of a TNC passenger trip; that is, the pay rates are pegged to the passenger (P3) time and miles. In order to pay drivers for the entirety of their on-app time and for all the miles they drive during on-app time, the per minute and per mile rates are scaled up. Scaling up the per minute pay rate involves dividing by the P3 share of on-app time; scaling up the per mile expense rate involves dividing by the P3 share of total miles driven during all three of the time segments for each trip. … The scaled-up 2024 base compensation rates for the Twin Cities metro area are 48.7 cents per minute and 89.0 cents per mile. … Applying the 2024 base rate pay standard per minute and per mile rates to the hours worked and miles driven during 2022 indicates that average pay per trip for Twin Cities drivers would rise by about 10 percent under the base pay standard.”

I won’t spend time here digging into with the underlying assumptions behind this calculation, like how the total expenses of operating a vehicle are calculated, or whether the P1 time (driver logged on) should be treated the same as P2 time (driving toward picking up a fare) and P3 time (actually transporting someone). But notice that the difference in per-minute fees here is small: 51 cents per minute for the Minneapolis City Council, and 49 cents per minute for the state report. The big gap is the per-mile payments: $1.40 per mile vs. 89 cents per mile. I’ll also add that when the bottom line from the state report is “pay would go up 10%,” my working assumption is that one could also tweak the calculations to say that pay is just fine where it is.

The Minnesota state legislation, with a Democratic majority, has now entered the picture. The most recent “compromise” proposal seems to be $1.27 per mile and 49 cents per minute.  This proposed per-mile fee of course, is well above what the state report recommended. Uber and Lyft are still announcing that they will leave the state if this is enacted.

Here, I’ll just offer a couple of thoughts: one about current pay levels for being a ride-share driver, and the other about likely outcomes if the current proposals go into effect–and then Uber and Lyft renege on their oft-repeated promises to leave and instead decide to stay.

The local labor market here is strong. The unemployment rate in the broader Minneapolis metro area has been about 2.5% since 2017–leaving aside the jump and decline in 2020 and 2021 related to the pandemic. The Minnesota state report notes:

In the post-pandemic period, and especially in 2022 and early 2023, the number of such job openings substantially exceeded the number of job seekers. As a result, pay has increased in low-wage jobs, reversing decades of stagnant wages and growing wage inequality. Data from the Minnesota Department of Employment and Economic Development (DEED) indicates pay for the lowest-wage jobs in the seven-county Twin Cities metro area rose nearly twice as fast during the past two years as for the overall private sector workforce, 13.7 percent compared to 7.1 percent.

During this period when jobs were available in the metro area and pay for low-wage jobs was rising, the number of drivers for Uber/Lyft was rising fast. There were apparently about 12,000 drivers for Uber and Lyft early in 2024, and the number increased by 25% from start of 2023 to the start of 2024. Indeed, a market had developed between Hertz and ride-share drivers, in which Uber and Lyft drivers could rent a car for about $335/week. When the Minneapolis City Council started voting to set rules for driver reimbursement, Hertz shut down the program. Apparently, being a ride-share driver looked like a good option, relative to other local job market alternatives.

If new rules for compensating ride-share drivers do go into effect, they will affect both the quantity demanded of rides and the quantity supplied of drivers. The state report offers some general and qualified thoughts about these effects.

The Minnesota state report notes: “Previous studies based on Uber data have found a one percent fare increase lowered demand for rides by 0.33 percent in Los Angeles, 0.52 percent in San Francisco, 0.61 percent in New York City and 0.66 percent in Chicago. The lower estimates are in cities with less dense mass transit alternatives. If Twin Cities rider price sensitivity is roughly in the middle of this range, passenger fares would have to increase significantly to substantially reduce the aggregate number of TNC trips.” Based on these kinds of studies, one might roughly estimate that a 10% rise in fares would reduce ridership by 5%. This drop-off isn’t extreme–but of course, it means that the 95% who continue to ride are paying the higher fares.

The potential adjustment in the number of drivers is perhaps more remarkable. The state report notes: “”Nonetheless, it seems likely that the number of drivers will increase as a result of the pay standard. To the extent driver supply increases, forward dispatch and P3 shares will decline. The pay standard could be adjusted to offset these likely responses.” To put this into English, a higher wage could attract more drivers (remember, the number of drivers in this market was rising rapidly), and then the average driver will spend a greater share of time waiting for fares and less time actually transporting passengers.

The per-mile and per-minute fees only apply when actually driving people around, so less time with passengers actually in the vehicle will tend to offset higher per-minute and per-mile fees. This effect is potentially substantial.

Jonathan V. Hall, John J. Horton, and Daniel T. Knoepfle have done a study called “Ride-Sharing Markets Re-Equilibrate” (NBER Working Paper 30883, February 2023). They have data on Uber drivers and trips across 36 US cities from mid-2014 to early 2017. They look at situations where Uber raised the base fare, and find that in the short-run, drivers make more money. But in the medium-run, after a couple of months, the higher fares attract more drivers and then two other effects kick in. One is that with more drivers, it becomes less necessary for Uber to use “surge pricing” to raise fares when demand is high, which reduces revenue for drivers who would otherwise have received those higher surge fares. The other effect is that the larger number of drivers means less time actually spent driving passengers: a fare increase of 10%, after more drivers have entered the market, leads to a drop in utilization of 7%. They write: “After about 8 weeks, there is no clear difference in the driver’s gross average hourly earnings rate compared to before the fare increase.”

(Full disclosure: The authors of this article work for Uber, in the research department. However, the NBER Working Papers is a well-regarded outlet for high-quality publications. Also, the data is what the data is.)

Of course, I don’t know if the higher fares proposed by the Minneapolis City Council and the Minnesota state legislature would be 100% offset by these counterbalancing effects of less time with passengers in the car. But there would surely be some offsetting effect.

There's a method of argument called “arguing in the alternative.” It most commonly arises in legal cases. You can imagine a criminal defendant who argues that they weren’t present at the scene of the crime; and if they were present, they didn’t do anything; and if they did do something, it wasn’t intentional; and if it was intentional, it wasn’t harmful; and if it was harmful, there were other contributing factors that caused most of the harm; and so on and so on. In a courtroom, the prosecution needs to offer proof on all of these points, so arguing in the alternative can be a useful strategy. But in real life, the long string of “if” statements sounds evasive and comical.

Thus, I’ve taken a sour amusement in listening to the evolution of arguments among supporters of the higher pay standards for Uber/Lyft drivers, which has gone roughly like this: Don’t worry, Uber and Lyft won’t leave; they are only bluffing. Also, if they do leave, then lots of other ride-share companies will move quickly to enter the market. Also, taxis and other forms of transit can take up the slack. Also, if other ride-share companies don’t enter the market, local entrepreneurs can build their own ride-share apps and enter the market. Of course, if the speaker really believed the first point–that Uber and Lyft won’t leave–the rest of the statements are irrelevant.

In 2023, there were almost 2 million trips per month in the broader Minneapolis metro area via Uber and Lyft. Back in 2015, there were about 1300 cabs licensed in Minneapolis in 2015; by a recent count, there are now 14. Yes, if Uber and Lyft leave Minnesota, there will be a cascade of other adjustments and something will take their place. But the short-term and intermediate disruption are likely to be severe. The costs will fall on those who have come to depend on these services for getting to health care appointments, to work, and even for getting home after overindulging in alcohol. If that happens, I will have an indigestible suspicion that if the state and the Minneapolis City Council had just followed the per-minute and per-mile numbers proposed by the state’s own Department of Labor and Industry , then the stated goal that Uber and Lyft drivers should earn the minimum wage would have been accomplished, and the costs and disruption could have been avoided.

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   
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