Why taxi fares are high and taxi driver wages low

I don’t often agree with The Age‘s campaigning journalism, but I thought they picked the right cause – if not quite the right argument – in their advocacy this morning on behalf of taxi drivers. The paper led this morning with the heading:

Fair evasion
12 hour shifts
Poor security
All this for $8 an hour

For the benefit of interstate readers, on Tuesday night a taxi driver, like many of them an Indian student, was stabbed by a passenger (who thanks to the cameras installed in cabs was arrested by police within 24 hours). At last report, the driver was still in a serious condition in hospital.

Drivers responded by blocking a major city intersection, eventually forcing the state government to agree to security screens and pre-paid fares late at night.

Though an analysis piece and an editorial did refer to the licence system in the industry, they did not draw the obvious conclusion that it is to blame for the miserable earnings of taxi drivers, despite the seemingly high fares paid by passengers.

The CIS has a long history – though one unfortunately without policy success – of criticising taxi regulation. One of its earliest publications, by Peter Swan in 1979, was a critique of regulation of the Canberra taxi industry. This was followed by articles by commenters on this blog, Jason Soon in 1999, and Christian Seibert in 2006.

There are two big issues with taxi regulation. The first, and the main source of the industry’s problems, is that you can only operate a taxi if you have a licence, and because that licence is tradeable it has hugely appreciated in value. As this report (pdf) from Victoria’s Essential Services Commission explained, the value of a licence has increased from $123,000 in 1989 to nearly $450,000 in 2007. What this effectively means is that only about 10% of the capital cost of putting a taxi on the road is real, and the rest is just rents created by regulation.

On top of that, taxi fares are regulated, and at a level that provides a return on such a massive investment. This explains why fares can be high and drivers get very low hourly rates at the same time.

Partly because of a belief that licence holders would have to be compensated, no state government has been able to deal with this problem, despite success in a wide range of other microeconomic reforms.

Personally, I agree with Christian’s analysis that:

Most taxi licences were acquired inexpensively decades ago. These owners have already enjoyed high returns on their investment and therefore should not be entitled to compensation. This argument applies also to owners of taxi licences bought from other taxi licence holders at later times. For example, taxi licences changed hands for $25,000 in 1982. These owners would also have had time to achieve good returns on their investment.

For recent purchasers of taxi licences the issues are more complex. Arguably, they were taking a risk in making this purchase. Investments in intangible assets are generally high risk and this is especially the case with taxi licences that are directly dependent on government policy. Investors in taxi licences hope to secure high returns—a taxi licence bought for $25,000 in 1982 is now worth $347,000, and high returns are normally associated with high risk.

But unfortunately I suspect that in another 30 years the CIS will still be publishing articles calling for reform of the taxi industry.

Update: Similar points now coming from the Age opinion page.

21 thoughts on “Why taxi fares are high and taxi driver wages low

  1. I think security screens are a good idea, but I’m not sure about the pre-payment. How will that actually work? Drivers can already ask for a deposit based on the estimated value of the trip. I would hope that there would be an ex post settling up method, or at least that the passenger pay the lessor of the pre-payment or metered cab fare.


  2. They already have the screens in many parts of the world (Sydney, for example). However, in places where taxis are allowed to be small (I imagine we use V6 Falcons here due to more stupid regulation) they always seem to broken (possibly by the drivers themselves), although I imagine the problem is easy to fix.


  3. Screens seem to be on their way out in Sydney. While reducing the risk of serious assualt, they also reduce conversation and convenience, and so make the lives of many drivers worse.


  4. Deregulating the taxi industry will be bad for the licence holders, which will be tough titties for them, and probably good for customers, but how will this help the taxi drivers? If there is less money going to the taxi owners/operators/drivers, the drivers, who are at the bottom of the food chain, may end up with even less than they do now.

    At deregulating the industry certainly won’t stop drivers getting attacked and abused.


  5. “but how will this help the taxi drivers”

    Demand will skyrocket, as almost every place taxis are cheap people catch them everywhere (often substituting them for owning a car). So they will get a lot more work.


  6. I agree with Spiros – deregulating the taxi market is a good idea, but the rents currently extracted by licence holders are most likely coming at the expense of customers, not drivers. If there are people willing to work for $8 an hour now, then while deregulation may raise wages temporarily, free entry will eventually bid them back down to where they started. Individual taxi drivers won’t get more work because the number of drivers will increase.


  7. I think one of the benefits for taxi drivers will be that they will no longer be forced to drive somebody else’s taxi (or lease their licence) if they want to work in the industry. It will be easier and cheaper to “be your own boss”, and that in itself has some value as demonstrated by the many people run shops and restaurants or other small businesses and forgo higher incomes doing other things because they want to be their own boss.


  8. I was in Newcastle a few weeks ago and the taxi situation there at nighttime is pretty pathetic, they’re almost impossible to find (not to mention that the nightlife there has been decimated by a curfew which is a whole other story.)

    Anyhoo, me and some mates were able to find a dodgy unlicenced taxi which was essentially just a guy driving people around in his Falcon and agreeing on prices before taking passengers. While this was at his danger he was absolutely raking it in and people were paying extra because of the convenience and probably the rebellious nature of it. He was handing out little plastic cards with his name and number on them so we were able to get an easy ride home too. Hopefully he’s still getting away with it but I doubt it.


  9. I recall catching taxis in Singapore and finding them much cheaper than here. Singaporean petrol prices are about the same as here and I assume driver wages are not substantially lower, so perhaps the difference is due to licensing/regulation. At the same time, fares in other developed countries are not noticeably lower than Australia (or are higher). So does this mean that taxi regulation is a widespread phenomenon or are there other factors at play?


  10. Singaporean taxis are very cheap (Malaysian taxis even cheaper). Wehereas South African taxis are about the same as here (at least in Cape Town). Perhaps the PC should undertake an international study of the taxi industry and make some recommendations.


  11. “Perhaps the PC should undertake an international study of the taxi industry and make some recommendations.”

    Nah, it’s a state government issue.

    IPART has just done a review of taxi fares in NSW. $372,000 for a plate, they reckon. That’s a lot of rents.

    While we’re on the subject of taxis and ripoffs, what abot cabcharge, with its 10% premium on top of your fare when you pay by credit card?


  12. $8 Hour! Bullshit! Taxi drivers get 50% of the fare and the licence holder has to pay for the cab , the maintenance, running costs and the licence and make a profit. Now if the taxi was only returning $8 hour before costs do you think that the licences would sell for so much? Nope either the drivers are underestimating their pay or they are not getting the 50% or something else is wrong. Either way I smell something fishy.


  13. The dynamics of taxi license value is exactly the same as the dynamics of house prices. The government restricts entry to a resource in demand, less gets supplied than otherwise would, prices mount and public policy becomes dominated by protecting the value of the asset then created. There is no solution except getting rid of the discretionary power of officials over market entry. The problem is how to get there from here.


  14. There were different taxi rates for different taxi companies in Hanoi a few years ago, if I remember correctly.


  15. Whenever they increase fare we lose in buisness, everything going high from petrol to simple grocery, But as i m a taxi driver i m earning the same as i was earning 10years ago P/Shift. Before there were too many jobs under $10 but now just MPTP:(.time to leave otherwise too late …


  16. It makes my blood boil to hear people say taxi fares are so high. People expect a chauffeur for peanuts. Bus fares to town in Newcastle from an outter suburb costs $5.00 per head. $20.00. So how do people get to complain that the same distance in a cab is $30.00. You have pick up at the door and drop off at the door in comfort. How much is a drink late at night? $9.00 for one. Wake up and pay up!


  17. It sounds to me like the reason why “taxi plates” cost so much is due to an artificial constraint of supply induced by the government.


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