(Bloomberg View) -- A study by the Massachusetts Institute of Technology’s Center for Energy and Environmental Policy Research made a splash the other day when it claimed that the median pay of an Uber or Lyft driver in the U.S. is only $3.37 an hour before taxes -- less than half the federal minimum wage of $7.25. That dismal number seemed to confirm many people’s fears that the gig economy impoverishes workers.
The company’s defenders quickly pounced. Uber’s chief economist, Jonathan Hall, wrote a blog post criticizing the survey measures the MIT team used to generate their results. The survey was ambiguous about whether it asked people about the total hours they spend driving for on-demand taxi services or whether it asked about their total hours worked (since many Uber drivers have other jobs). As a result, the MIT study probably understated on-demand drivers’ hourly wages by a significant amount. The authors of the paper, realizing their mistake, issued a correction.
So how much do Uber drivers really make? The easiest way to tell is to use Uber’s own data. Hall has addressed the question in two papers, the first with Princeton economist and one-time Uber consultant Alan Krueger, and the second in 2018 with economists Cody Cook, Rebecca Diamond, John List and Paul Oyer.
The more recent paper finds that the average Uber driver has gross hourly earnings of $21.07 -- not a bad wage, if that were really what drivers took home. But gross earnings are not how much drivers actually pocket. Uber charges a commission, called a service fee, of 25 percent on every ride (slightly lower for long-time drivers). It’s very odd to report drivers’ “earnings” without deducting Uber’s cut.
A 25 percent fee reduces driver earnings from $21.07 to $15.80, as Hall noted in a footnote to his post. If Uber neglected to include the other fees it charges drivers, pay could be even lower. In my opinion, it’s $15.80 that should be the headline number, with “gross earnings” relegated to a footnote.
But even that $15.80 isn’t the true amount that drivers are earning. An Uber driver has to pay for gasoline, maintenance, some insurance and repairs. Cars also depreciate according to how many miles they’re driven, even if they’re very well-maintained. According to the Kelley Blue Book, a 2010 Honda Civic in excellent condition with 100,000 miles is valued at about half the amount of a similar car with no miles on it. Drivers can write off many of these costs on their taxes, but since drivers for whom Uber is the primary source of income are in a very low tax bracket, that won’t end up recouping a lot of the costs.
Hall’s paper with Cook et al. uses cost data from an earlier paper by the same MIT research team whose later paper Hall criticizes in his blog post. So at least there’s broad agreement here. There is one difference -- the MIT team includes insurance costs, and arrives at a number of 32 cents a mile. Cook et al., noting that Uber pays for liability insurance (but not collision insurance) while drivers are using the app, use a more conservative figure of 25 cents a mile. Since Uber drivers average about 20 miles per hour while using the app, this means hourly costs of $5 to $6.40.
In other words, the true amount that the average Uber driver makes, net of all costs, is probably about $10 an hour. That varies by location, of course. But there are relatively few places in the U.S. where you can live a decent life on $10 an hour. You certainly can’t support a kid on that -- working 40 hours a week for that amount would put you right around the federal poverty line for a family of two.
So why do so many people drive for Uber and Lyft? It could be that the labor market has become so polarized that for many Americans, $10-an-hour work is the best they can get. Or it could be that Uber drivers are simply bad at business. They may simply ignore costs like depreciation and maintenance when mentally calculating how much they make. Since most drivers probably use their car for personal purposes as well as for work, they may mistakenly think of their maintenance and depreciation costs as consumption rather than as a cost of doing business.
In the short run, people are subject to all sorts of behavioral biases. In the long run, they wise up. As of 2017, about 96 percent of Uber drivers stopped driving for the company within a year. Some of these were probably using the ride-hailing app as temporary work in between more formal employment, or as a side gig. But surveys suggest that drivers are simply not able to make as much money as they expected. In fact, the Federal Trade Commission accused Uber of misleading drivers about how much they could earn, and Uber settled for $20 million in early 2017.
And this gets to the real heart of the problem with the gig economy. Companies such as Uber expect their drivers to act not like employees, but like owners of a small business. But most people just aren’t that good at running a business. Relatively few middle- and working-class people are trained to think in terms of capital depreciation, fixed costs and the like. A gig economy that relies on small independent contractors consistently making bad business decisions isn’t the future of work.
Of course, Uber’s drivers might not be the only ones who are bad at staying in the black. Even after increasing its driver fees and cancelling its big planned expansion in China, Uber had a loss of $4.5 billion in 2017. Unless it curbs its own expenses, Uber -- like most of its drivers -- might not be around for the long haul.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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