Ride-hailing giants Uber and Lyft are delivering pitiful levels of take-home pay to the hundreds of thousands of US independent contractors providing their own vehicles and driving skills to deliver the core service, according to an MIT CEEPR study examining the economics of the two app platforms.
The report catalyses the debate about conditions for workers on gig economy platforms, and raises serious questions about the wider societal impacts of tax avoiding, VC-funded tech giants.
The study, entitled The Economics of Ride-Hailing: Driver Revenue, Expenses and Taxes, and which was carried out by the MIT Center for Energy and Environmental Policy Research, surveyed more than 1,100 Uber and Lyft ride-hailing drivers combined with detailed vehicle cost information — factoring in costs such as fuel, insurance, maintenance and repairs — to come up with a median profit per hour worked.
The upshot? The researchers found profit from ride-hail driving to be “very low”. On an hourly basis, the median profit was $3.37 per hour, with 74% of drivers earning less than the minimum wage in the state where they operate.
They also found a median driver generates $0.59 per mile of driving but incurs costs of $0.30 per mile; and almost a third (30 per cent) of drivers were found to incur expenses exceeding their revenue or to be losing money for every mile they drive.
The research also looked at how ride-hailing profits are taxed, and suggests that in the US a majority of driver profits are going untaxed owing to how mileage deduction is handled for tax purposes — suggesting Uber and Lyft’s business are denuding the public purse too.
From the study:
On a monthly basis, mean profit is $661/month (median $310). Drivers are eligible to use a Standard Mileage Deduction for tax purposes ($0.54/mile in 2016) which far exceeds median costs per mile of $0.30/mile. Because of this deduction, most ridehailing drivers are able to declare profits that are substantially lower. Mean drivers who use a Standard Mileage Deduction would declare taxable profit of $175 rather than the $661 earned. These numbers suggest that approximately 74% of driver profit is untaxed.
The authors add that if their $661/month mean profit is representative then the US’ Standard Mileage Deduction facilitates “several billion in untaxed income for hundreds of thousands of ride-hailing drivers nationwide”.
So what does the study tell us about the ride-hailing business model? “It tells us that it’s a shitty place to work,” says Mark Tluszcz, co-founder and CEO of Mangrove Capital Partners who has described the gig economy model as the modern day sweatshop, and says his VC firm made a conscious decision not to invest in gig economy companies because the model is exploitative.
“It tells you that it’s a great place if you’re a company. It’s really a poor place to be an employee or be a worker.”
The exploitative asymmetry of ride-hailing platforms comes because workers have a certain amount of fixed costs but the platform intermediary can just hike its commission at will and lower the service cost to the end user whenever it wants to increase competitiveness vs a rival business.
“At the end of the day there are a certain amount of fixed costs [for drivers],” says Tluszcz. “You have to buy a car, you have to get insurance, you have to pay for gas… And if you as an intermediary, which those platforms are, are taking an increasing amount of commission — 10%, 15%, now 20 in most of their markets — and then you’re using the price of the trip as a way of beating your competitor… then you as a driver are sitting there with basically all of your fixed costs and your income is going down and frankly the only way to cover your costs is to spend more hours in the car.
“Which is frankly what’s clearly illustrated by this study. These people have to spend so much time to cover their costs when you break it down to an hourly revenue, it’s a pitiful amount. And by the way you have no social coverage because you’ve got to take care of that yourself.”
At the time of writing neither Uber not Lyft had responded to a request for comment on the MIT study. But an Uber spokesperson told The Guardian the company believes the research methodology and findings are “deeply flawed”, adding: “We’ve reached out to the paper’s authors to share our concerns and suggest ways we might work together to refine their approach.”
Tluszcz was quick to dispatch that critique. “MIT is not some second tier organization that did this study,” he points out. “For me that’s a reference moment when MIT says look, there’s an issue here… There’s something wrong in the model and we can tolerate it for a period of time but ultimately we’re creating this lost generation of people.”
“These business are built on situations in the market that are not realistic,” he tells TechCrunch. “They took advantage of a hole in legislation… Governments let that happen. And it made all of sudden services cheaper. But people have to eat. People have to live. And ultimately there’s only 100% of a cake.
“Cabbies in the UK are not millionaires; they make a decent living. But they make a decent living because there’s a certain price-point to offer the service. And in every industry you have that. There is a certain fair price point to be able to live in that industry… And clearly right now, in the ride-sharing businesses, you don’t have it.”
In Europe, where Uber’s business has faced a series of legal challenges, the company has begun offering some subsidized insurance products for platform workers — including one for Uber Eats couriers across Europe and a personal injury and insurance product for drivers in the UK.
In January in the UK it also announced a safety cap on the number of consecutive hours drivers on its platform can accept trips, after coming under rising political and legal pressure on safety and working conditions.
Last year Uber also lost its first appeal against an employment tribunal that judged a group of Uber drivers to be workers, not self-employed contractors as it had claimed — meaning they are entitled to workers rights such as holiday and sick pay.
Uber also had its license to operate in London withdrawn last fall, with the local transport regulator citing concerns about safety and corporate responsibility as key considerations for not renewing the company’s private hire vehicle license.
Tluszcz’s view is that such moves prefigure a more major shift incoming in Europe that could cement permanent roadblocks to business models that function via intentional worker exploitation.
“The flaw in the [gig economy] model as a worker is so big that it seems to be quite clear that European governments are going to be looking at this and saying this is just not the European ethos. It’s just not,” he argues. “There’s going to be a moment when all these things are clashing. And I think it’s a cultural clash that we have really, between European values of equity and American values of just pure market capitalism.
“You can’t expect somebody making $3.37 an hour to take a part of that to contribute to retirement and social coverage. What the hell do you live on?” he adds.
“We’re creating the next lost generation of people who simply don’t have enough money to live and those companies are fundamentally enabling it under the premise that they’re offering a cheaper service to consumers… And I just don’t think Europe will put up with this.”
Last month the UK government confirmed its intent to act on this area by announcing a package of labor market reforms intended to respond to changes driven by the rise of gig economy platforms. It dubbed the strategy a ‘Good Work Plan’ — billing it as an expansion of workers rights and saying “millions” more workers would get new day-one rights, coupled with a tighter enforcement regime on platforms and companies to ensure they are providing sick and holiday pay rights.
“We are proud to have record levels of employment in this country but we must also ensure that workers’ rights are always upheld,” said the UK prime minister, also emphasizing that her goal was to build “an economy that works for everyone”.
It’s likely to publish more detail on the employment law reform later this year. But the direction of travel for gig economy platforms in Europe looks clear: Away from being freely able to exploit legal loopholes and towards a much more tightly managed framework of employment and workforce welfare regulations to ensure that underlying support structures (such as the UK’s national minimum wage) aren’t just being circumvented by clever engineering and legal positioning.
“This for me is an inherent dilemma one has between capitalism and some level of socialism which we have in Europe,” adds Tluszcz. “This is a clash of two fundamentally different views of the world and ultimately as a company you have to be a company that views your role in society as one of being a contributor — and tech companies can’t hide behind the fact; they must do the same.
“And unfortunately all these ride-sharing businesses, and including most of these gig economy companies, are just trying to take advantage of holes and frankly I don’t see them at all looking at their reason to be as at least having a component of ‘I’m good for the society in which I operate’. They don’t. They just simply don’t care.
“That’s a dilemma we have as consumers, because on the one hand we like the fact that it’s cheap. But we wish that people could all have a decent living.”
Whether US companies will be forced into a less exploitative relationship with their US workers remains to be seen.
Tluszcz’s view is that it will need some kind of government intervention for these types of companies to rethink how their models operate and who they are impacting.
“Tech companies frankly have an equal amount of responsibility to be great corporate citizens. And right now it feels — particularly because many of these tech companies are born in the US — it almost feels like this Americanism about them says I don’t have to be a good corporate citizen. I’m going to take advantage of the world for me and my shareholders,” he says.
“I’m a capitalist but I do think there’s some moral guidance you have to have about the business you’re building. And the US tech companies, around the world — certainly in Europe — are being highly criticized… Where is your moral compass? And unfortunately, today, sitting here, you have to say they lost it.