A Fare Day’s Pay

the political economy of taxi drivers

A taxi cab drives through Times Square as snow falls in Manhattan, New York on March 14.

It is difficult to wrap the mind around the scale of the mass urbanization of the mid-to-late 20th century. In 1970, Istanbul had 2.8 million inhabitants, roughly the size of current-day Saint Louis, Missouri. Today it has 15 million. Kuala Lumpur surged from 450,000, the size of Reno, Nevada, to 7.2 million today. And Dubai has grown by 1,600% since 1970, from 100,000—the population of Fairbanks, Alaska—to 2.7 million. Lima quadrupled, from 2.5 million to 10 million in that same period. The list goes on.

With these demographic explosions have come great challenges, both political, economic, and perhaps, most pressingly, social. Reaching full employment is a challenge in any society not specifically geared for total war; moving millions of people across town each day a feat of arms before which even Albert Speer might flinch. Nowhere are the contradictions between achieving full employment in a mass society and transporting millions of commuters each morning more apparent than in the regulation of the taxi industry.

On the one hand, driving a cab is a means of employment for millions of men (and a handful of brave women) and a much-needed source of transportation in countless cities struggling to cope with demographic explosion, inadequate public transportation, and the high cost and low efficiency of owning a car themselves. Indeed, Mexico City alone has 40% more cabbies today (140,000) than it did people at the time of the Mexican-American War.

Sadly, like a belly full of meatballs and Swedish fish, there can be too much of a good thing. When too many taxis take to the streets, traffic rises, pollution mounts, and wages across the board are driven down. To mitigate these problems, drivers often make matters worse: to compensate for low fares, they take riders in circles, only exacerbating the problems of traffic, pollution, social mistrust, and urban anomie.

In developed economies, regulators have long since struck back with a vengeance. First, by creating barriers to entry through the creation of a limited amount of taxi permits, and second, by legalizing secondary markets on which these permits can be bought and sold to the highest bidder. As one can see from tumultuous spikes in New York, Paris, Hong Kong, and Istanbul, these secondary markets often take on an economic life of their own, creating mini-cottage industries that double as bullish market-places when other investment opportunities appear less appetizing.

Armies at bay

The first to ever do so was New York City’s Mayor Fiorello LaGuardia, with the passage of the 1937 Haas Act. At the height of the Depression the city had 30,000 taxi drivers, their ranks bolstered by a surplus army of unemployed that far exceeded the city’s demand. Capped at 16,900 licenses in 1937, the figure has since dwindled to 13,600 today, never to exceed the limits set by a Depression-era strongman until the legions of Uber drivers shattered this “playing field” in 2011.

Though taking a (justified) beating with the arrival of Uber, the NYC medallion has still outperformed inflation, gold, and the stock market since calculations began in 1959, blossoming from USD140,000 in real US dollars in 1980 to USD1.3 million at its peak in 2014. As has proven the case in Hong Kong, the value of the medallion more or less functions as a bond: when interest rates (are expected to) fall, the value of the bond goes up. When they rise, the value of the bond, or in this case the taxi license, goes down.

Like hot money flows, the combination of strong political-economic mechanisms (i.e. the strict enforcement of rent-seeking license restriction), unceasing demand for urban transportation, and interest-hungry cash flows all but guarantees the high value of such a bond. With one exception: the sucker-punch of unsuspected and un(der)regulated competition.

Meanwhile, in more humanitarian countries where regulated but inefficient markets grow saturated with too many drivers, the state can also issue license buy-back schemes to lower the number of cabs on the street without disenfranchising those whose better years went into acquiring them. Quebec and Australia have done this with no small degree of success, and France is considering a similar gesture. What’s more, this policy offers debt-strapped, despair-laden cabbies a second lease on life; all too often many who’ve long since tired of the profession remain behind the wheel only to repay the loans they’ve taken out to acquire the license.

A ticket to ride, or a ticket to ransack?

To be sure, taxi regulations in the developing world display a markedly different picture. Of the five studies included in our review—Istanbul, Mexico City, Kuala Lumpur, Dubai, and Lima—only Istanbul has allowed a secondary market in the buying and selling of licenses to emerge. As a result, the number of (regulated) taxis in the city has remained frozen for a quarter of a century at just under 18,000—a period in which the city’s population doubled and the economy grew by 250%. As a result of this extremely limited amount, Istanbul has one of the worst ratios of taxis to inhabitants in the world (833:1).

To be sure, this is partially offset by the city’s increasingly stellar public transportation network (as was also the case in Hong Kong, which also had a rather low ratio at 400:1), but it has also spurred a huge cottage industry in unregulated pirate taxis, now thought to number 50,000 (which, together with regulated taxis brings Istanbul’s inhabitant-cab ratio up to 192:1).

Oddly, the capitalization of Istanbul’s secondary license market has so far weathered this aforementioned army of pirate taxis; whether it can the ride-sharing apps remains to be seen (the costs of licenses have fallen in dollar, but not lira, terms since 2013—but this is more because of a weakening macro-economic outlook and political instability than competition from apps).

In the other four cities, none of which have high barriers to entry, a different picture emerges. Lima, for example, suffers from precisely the opposite effect: a glut of drivers—more than 200,000, a ratio of 54:1, and account for nearly 2% of the city’s population!—clog the city’s streets (accounting for what the mayor’s office claims is 72% of its traffic), drive down wages, and generally add to the chaos of life in Lima’s uncontrolled urban expansion.

Two of the biggest factors that have driven this surge in cabbies—poor public transportation infrastructure and practically no barriers to entry—are finally being addressed: Lima’s first metro line opened in 2011 (and three more are currently in development) and the mayor has promised to freeze the number of licenses. But the ultimate root of oversupply, the need to employ a surplus army of labor, will not disappear with the arrival of either.

Things look a little better in Kuala Lumpur and Mexico City, where moderate license fees have curbed excessive oversupply while keeping apace with population growth. Without the cumbersome financial or legal barriers to entry, taxi drivers in these cities take home the bulk of their earnings (62.5% in Mexico City and 57% in Kuala Lumpur), compared to the measly 29% and 30% their counterparts take home in Hong Kong and Istanbul, respectively. After costs, drivers in Mexico City take home around USD750/month, whereas drivers in KL pocket USD675. Far from a killing, but three times the minimum wage in Malaysia and six times that of Mexico.

The story takes an interesting, if predictable, twist in Dubai. With the bizarre combination of 0.3% unemployment and a foreign workforce that accounts for 90% of its working population, the scope for individual initiative on the ground is low—with taxi drivers responding less to citywide market forces than visa regulations and commission benchmarks for big cab companies.

Though bringing home sizeable pay (USD990/month), cabbies in Dubai only pocket 35% of what they gross each day—much closer to medallion- and license-distorted markets than what drivers take home in more emerging economies where regulations have yet to take hold. However, at 12-hour shifts, seven days a week, Dubai cabbies also work considerably more hours than their counterparts in Mexico, Malaysia, or Turkey.

Nonetheless, from the consumer and city-planning perspective, Dubai remains ideal. Its ratio of 150:1 is on par with New York and London, and its public transportation network robust and expanding. Since inflation (2.3%) and the cost of living (68 compared to the Economist Intelligence Unit’s benchmark of 100) are both relatively low, cabbies in Dubai can set aside enough to return home with something of a nest egg—if the stress of working 85-hour weeks doesn’t take its financial or physical toll first.

Carrots, sticks, and stones

The conclusions to draw from such a review are somewhat obvious—so much so they’re easily obscured. The modern metropolis requires ready, mobile, and flexible transportation, and often obviates the need for individuals to possess their own automobiles. For cities in rapid expansion (2,700% growth in Dubai, 400% in Lima, 1,600% in Kuala Lumpur, 535% in Istanbul, and 300% in Mexico City) the surplus pool of labor from the countryside will always exceed employment opportunities on the ground; to prevent wage depression and excessive traffic and pollution, cities must limit the number of taxis on the streets.

Yet they should not simply cap the number of licenses and allowing secondary markets to emerge (as in New York, Hong Kong, Istanbul, and Paris)—which, so long as cities are growing and public transportation remains inadequate, only encourages rent-seeking behavior that drives up prices at the expense of both consumers and cabbies to the advantage of said “bondholder” (the owner of the license).

Rather, the number of licenses should be pegged to the number of inhabitants (200:1 is a suitable ratio for cities with solid public transportation, 150:1 for those without it), and the predominant barrier to entry should be knowledge- rather than capital-based. This will lead to better services, higher wages, more owner-occupied taxies, and, eventually, lower costs to consumers once bondholders are no longer skimming off the top of every ride.

In the long run, the greatest threat to the taxi industry is good public transportation and an enlightened absolutism that would see us all riding bicycles to work: whence the race to privatize bike-lanes will commence. Until then, it is rideshare apps with precisely the aforementioned attributes: low barriers to entry, a knowledge- (or in this case “good-naturedness”) based review system, and higher returns to labor than capital (in the case of Uber, take-home pay for drivers is around 54% of gross after fees and expenses: not Panglossian but far better than going rates in Istanbul, Dubai, and Hong Kong).

Until cities and taxi companies find a way to rationalize their barriers to entry and pricing schemes, they will find steep competition from technology-based challengers. Even if in the dustbin of history by 2030, don’t expect the industry to go without a fight. Benjamins may be fungible, but monopolies rarely are. In the coming fight, someone’s bound to get bloodied: whether that’s the cabbie, the customer, or the license-holder is up to the policy-makers and old-fashioned political economists. Backed up, of course, by whoever’s got the sweetest carrot and the biggest stick.