An analysis of labor regulations for transportation network companies. (December 2022)

• Record Type: Journal Article
• Authors: Shetty, Akhil; Li, Sen; Tavafoghi, Hamidreza; Qin, Junjie; Poolla, Kameshwar; Varaiya, Pravin
• Is Part Of: Economics of transportation. Volume 32(2022)
• Publication Date: 2022-12
• Subjects: Transportation Network Company (TNC) -- Ride-sharing -- Assembly Bill 5 -- Proposition 22 -- Gig Economy; Transportation -- Periodicals; 388.049
• DOI: 10.1016/j.ecotra.2022.100284
• Languages: English
• ISSNs: 2212-0122

Abstract

Abstract: There is a growing movement worldwide to regulate transportation network companies (TNCs) such as Uber and Lyft. This is driven by concerns over low driver wages. Two recent labor regulations that were passed in California are Assembly Bill 5 (AB5) and Proposition 22 (Prop 22). AB5 classifies drivers (and other gig-economy workers) as employees as opposed to contractors. The implication is that ride-hailing companies must pay drivers a minimum wage and associated benefits, and that the drivers work full-time. This negatively impacts the TNC business model in two ways: (a) wage effect: higher wages and benefits reduce profit margins significantly, and (b) flexibility effect: having a base of full time drivers reduces the ability of TNCs like Uber and Lyft to match driver supply to customer demand on a fine temporal scale. As an alternative, TNCs lobbied fiercely for Prop 22. This regulation offers drivers 120% of minimum wage, but only for driving hours spent servicing a trip ( engaged time ). This paper studies the impacts of these and other possible regulations using data from the city of San Francisco. We develop a market-equilibrium model that captures passenger demand and driver supply in response to TNC's pricing decisions. We show that the flexibility effect under AB5 can be largely mitigated by offering staggered driver shifts. The wage effect is substantial and undermines the viability of the TNC business model. We find that the wage effect leads to a 18% decrease in TNC profit, whereas the flexibility effect results in a profit reduction ranging between 1%–10% depending on how shifts are designed. On the other hand, Prop 22 will preserve TNC profitability, but the guaranteed engaged time wage promised by Prop 22 is insufficient to materially increase driver wages. We show that this concern cannot be addressed by further increasing the engaged time wage, as it will increase passenger fares, increase driver cruising time, reduce efficiency, and significantly reduce TNC profit. We then suggest suitable modifications to each of the above regulations that can improve outcomes for drivers and passengers without jeopardizing the TNC business model. Highlights: We study the impact of labor regulations on transportation network companies. Increase in wages reduces TNC profit by 18% under Assembly Bill 5. Loss of driver supply flexibility reduces profit by 1-10% depending on shift design. Proposition 22 preserves TNC profit but does not increase driver wages. We propose alternatives that improve driver outcomes while preserving TNC profit.