Sunday, May 18, 2014

The Washington D.C. taxi cartel

A recent reasonTV video talks about new companies like uber and lyft battling the DC taxi cartel. The video is good and I recommend the whole thing. The DC taxi cab commission is crony capitalism at its worst.

In this post I want to focus on one part of the video. At about the one minute mark the video mentions how the supply of taxi medallions in DC has been fixed for years. It also mentions that taxi drivers need permits and that the city has recently begun issuing new permits for drivers again even though the amount of medallions has not changed.

When I heard that it got me thinking about the wages of taxi drivers. Taxis are produced in a fixed inputs production process. In economic jargon it is called a Leontief production function. In other words, each functioning taxi needs 1 driver and 1 car. Adding more cars/drivers without adding more drivers/cars does not produce any more functioning taxis (although Google is trying to change that and I am looking forward to it). So what do more driving permits mean for drivers?

We can think about this using the supply and demand framework.

In the above diagram, the demand for taxi drivers by the companies who own the medallions is represented by the vertical demand curve and is fixed at the number of medallions allowed by the D.C. taxi cab commission. The supply of drivers is initially the supply curve S1. When D.C. starts issuing new driver permits, the supply curve shits out to the red curve, S2. As can be seen in the diagram, this supply shift means that the equilibrium price of a driver, i.e. the wage paid by the cab companies, falls from W1 to W2. Because the amount of medallions is fixed no new taxis result from the increase in the number of drivers with permits.

A quick Google search did not lead to any articles about what caused D.C. to begin issuing driver permits again, but looking at this diagram it wouldn't surprise me if the medallion owners wanted the number of driver permits to increase. After all, more divers competing for the same amount of cabs means that the price of their labor will be lower all else equal. This is what is predicted by the diagram.

The Bureau of Labor Statistics website has wage data for occupations by metropolitan area. I pulled the data for D.C. cab drivers. A graph of annual earnings from 2007 - 2013 (most recent year available) is below.

As shown in the graph, the mean and median salary of taxi drivers/chauffeurs fell from 2011 to 2013 after rising for the previous 5 years. This evidence should be taken with a grain of salt though, since it does not isolate cab drivers only, nor does it hold everything else constant. There was likely a lot more going on in D.C. from 2011 to 2013 other than more driving permits being issued. That being said these wage numbers do support the theory.

Capping the amount of cars allowed while issuing more driving permits should lower the wage of taxi drivers all else equal. An initial look at the data supports this theory. Politicians often talk about helping the working class but in the case of the D.C. taxi commission their policies are lowering wages for the drivers, costs for the medallion owners. and not producing any more taxis for the consumers. And since taxi rates are fixed by law, if the wage paid to drivers decreases and the rates are not changed to reflect this wage drop the medallion owners will make more money. This is why I wouldn't be surprised if the medallion owners supported the issuing of new driver permits.

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