Taxi Regulation Reduces Driver Opportunity

For decades, state and local governments have imposed dramatic entry controls on the taxi industry across the United States. These regulatory hurdles benefit established companies at the expense of drivers. Many cities issue “medallions,” a permit that grants its owner the legal right the right to operate a taxicab. These cost over $360,000 in Chicago and $1 million in New York. Twenty-one of the 50 biggest cities maintain ordinances or fall under statutes strictly limiting the number of cab permits which may be issued.

Many states and localities classify the taxi industry as a “public utility.” For example, taxis fall under the regulatory authority of the Public Utilities Commission in Colorado and Pennsylvania (outside of Philadelphia).  A startup taxi company in 19 of the 50 biggest cities must prove the need for its business before receiving permission to operate  in the form of a certificate of public convenience and necessity. These certificates are a highly restrictive type of company permit used to closely regulate the availability, quality, financial practices, and mergers of firms providing services to the public, such as cable tv, electricity, natural gas, or water services. Opposing parties—such as existing taxi companies—often protest the “public necessity” and therefore legality of these startup competitors. Entrenched companies argue they would provide the service if demand existed and shift the burden of proof that a market exists to the potential competitor. Sometimes, applicants must prove to the regulatory authority that the existing service is inadequate to meet public demand before being issued a permit. Understandably, this has made it very difficult to compete with established companies in most areas, shifting the balance of power between driver and company in favor of the latter.

These regulations make permits for companies and cabs very valuable and costly to obtain. Unfortunately, these costs are often passed on to struggling drivers in the form of exorbitant fees to lease licenses or operate a franchised vehicle. The more draconian the regulatory scheme, the higher the fees. This is quite an onus to place on an already struggling sector of the workforce. Moreover, it is regressive. Taxi drivers’ median annual income (including tips) in the 50 biggest cities is just $22,693, despite providing an invaluable service that provides numerous benefits, such as preventing drunk driving and providing transportation to those without vehicles. This translates to $11.09/hour—gross.

In Miami-Dade County, the privilege of operating a cab for a day costs nearly $100. Between licensing fees, gas, maintenance, and driver permitting fees, drivers actually make below minimum wage. This is not unique. Portland, Oregon drivers average a net hourly income of $6.22. San Diego drivers earn less than $5—due in part to the county’s practice of capping the number of firms allowed to provide taxi services. Our estimates peg Jacksonville driver incomes at less than half the state’s minimum wage after leasing and gas costs are taken into account.

The harsh reality of life as a cab driver is that regulation works for entrenched companies. Our preliminary regression analysis has shown a significant negative relationship between the practice of permitting companies (a policy strongly supported by the companies themselves) and driver wages. Particularly stringent company permitting requirements lower wages even further. Concentrated markets, i.e., markets in which a large number of permits are owned by a relatively few number of firms, also see lower driver wages relative to less concentrated markets.

Eliminating draconian taxi regulation, such as public convenience and necessity requirements, will go a long way to increasing taxi driver wages and opportunities. Taxi drivers should be allowed to own their own businesses just like rideshare drivers are currently allowed to around the world. Given the clout of established taxi interests, phasing out monopoly privilege and its faulty economic rationale may be politically difficult for policymakers, but it is the efficient and equitable solution in the long run.