Uber isn't just good for consumers. Economists say drivers win, too

Consumers seem to be coming out ahead as smartphone-based rideshare services like Uber start to challenge taxis.

But are drivers benefitting from their arrival?

The University of Chicago’s Booth School recently asked economists from its Initiative on Global Markets (IGM) whether the competition generated by the new rideshare economy benefitted consumers, assuming the services reach the same levels of safety and insurance as existing companies.

The response was literally unanimous in the affirmative, with only some variation in the number of economists who said they “agree” or “strongly agree.”

What the school didn’t ask was whether that competition was good for drivers. San-Francisco-based Uber has been accused of providing misleading information about how much money could be made working as an Uber contractor, and of changing policies without warning. Some Lyft drivers also recently protested pay cuts enacted by their parent company.

So we put the question to the economists ourselves.

The ones we reached acknowledged that the wages ride-share services pay don’t appear to be great. But they nevertheless argue that they are on balance beneficial to drivers who own their cars and are looking to supplement their income — especially when compared with taxis.

In most large U.S. cities, taxis operate as cartels. Wealthy individuals or firms purchase medallions, or operating licenses, from the municipality, which are then rented out to drivers, along with the cabs themselves. This system puts both passengers and drivers at a disadvantage, according to University of Chicago professor Austan Goolsbee. The former tend to get overcharged on rides, while the barriers to entry for the latter become prohibitive.

“You have to pay hundreds of thousands of dollars for a [taxi] medallion — it’s a protected monopoly,” he said. “Competition is good, not bad. If the argument on other side is ‘Let’s not have competition, let’s have a taxi monopoly of medallion owners,’ I either don’t understand that argument, or totally disagree.”

MIT’s Daron Acemoglu said consumer demand for Uber’s services will drive wages upward.

“If Uber comes to replace standard taxi services to a significant degree and it doesn’t pay enough, then it will have to increase its rates and payments to labor.”

He added, “Of course, in our modern economy, service jobs for middle-skill workers are not paying great, but I don’t think this should be an argument against Uber.”

Taxi companies across the country have sued the ridesharing services, but the grounds for suits seem to betray the inefficiencies of taxis. In Atlanta, for instance, a group of cabbies are arguing that it’s unfair rideshare services do not have to pay the same $160-a-week in fees that they must cough up to the city. And in Maryland, taxi companies have complained that Uber is the one that has violated anti-trust rules.

Governments themselves have begun to embrace the service. A judge dismissed a lawsuit by Cambridge, Mass., that challenged a state agency’s approving Uber operations as an “abuse of discretion,” ruling that the agency had acted within its authority. In a recent press conference announcing the expansion of its regional headquarters in Chicago, Illinois Governor Pat Quinn touted the company’s promise to create more than 400 jobs.

“Through innovation and job creation, Uber is helping drive Illinois’ economy forward,” Quinn said.

Yale economist Judith Chevalier said that many of the drivers she’s encountered are former cab drivers who describe moving to Uber as a financial upgrade.

“Working for Uber is not highly remunerative, but working for the cab company is even worse,” she said.

One thing that could soon change this equation is the advent of Uber fleet management, which allows one Uber driver to own multiple cars and get a cut of fares — something that sounds an awful lot like a nascent cartel. The service is currently being offered in New York, according to Buzzfeed.

But for now, it seems as if the service usually works in a driver’s favor — especially drivers who may have once driven cabs. Abdoulaye Adjei, one of the drivers who picked up Yale’s Chevalier, has only been with Uber for two weeks. Before that, he drove a taxi for a local New Haven company for 12 years.

Adjei says he will never go back. He said he would have to pay up to $900 for the cost of leasing the cab, and was at the whim of the company’s dispatcher.

Uber allows drivers to “work more freely and have as income as needed,” he said

Rob covers business, economics and the environment for Fusion. He previously worked at Business Insider. He grew up in Chicago.