Excessive rates and their negative effects: A review of Minnesota’s proposed pay standard

by Uber Under the Hood

In early March, Minnesota’s Department of Labor and Industry released a report recommending parameters for state-level legislation on rideshare pay. While the recommendations are more reasonable than those of a city-level ordinance adopted in Minneapolis, they are still exaggerated and based on a flawed approach. In this blog post, we will examine the study’s methodology with a focus on expenses and benefits.

To recap, the report recommended two sets of rates for the Twin Cities and Greater Minnesota: ‘base’ rates accounting for minimum wage and expenses, and ‘comprehensive’ rates accounting for benefits like health care and retirement savings. We estimate that the rates would increase labor costs by roughly 20–40% in the Twin Cities and 15–25% in Greater Minnesota (for base and comprehensive rates, respectively).

Expenses

Why are the costs so high? Let’s start with expenses. The authors estimate that the cost of driving for a rideshare driver in Minnesota amounts to about 64 cents per mile. Fortunately the authors were transparent about their calculations, so we can see what’s behind the overestimate.

To start, vehicle costs fall into two categories: fixed and variable. Fixed costs don’t change with vehicle use. These can be incurred upfront, like vehicle registration, or realized upon sale, like the depreciation associated with a vehicle aging. Variable costs, in contrast, accumulate with vehicle mileage, e.g., fuel costs, depreciation from wear-and-tear, and maintenance costs. These two categories allow us to measure vehicle costs in terms of the total cost of ownership (the sum of fixed and variable costs for a hypothetical amount of mileage) or the cost associated with driving an additional mile, which is referred to as the “marginal” cost of driving and is the sum of variable costs.

This distinction is critical for understanding the cost of driving on Uber since most drivers would own a vehicle regardless of driving on Uber. For example, consider the group of MN drivers who took their first trip around this time last year, between January and March of 2023. 72% were decidedly part-time, averaging less than 20 hours online per week during weeks they logged onto Uber at all. And more than 60% stopped driving within 12 months. These figures are consistent with drivers putting to work a vehicle they would own regardless of Uber.

And what about the ~40% of drivers who are still driving on Uber more than a year later? Local regulations around vehicle mileage require drivers to report their mileage annually to Uber. Most of these drivers stayed in the same vehicle for the entire year, and we can compare their total annual mileage against mileage on Uber. The results aren’t surprising:

• Median annual total mileage was about 35,000.¹
• More than 60% of these relatively long-time Uber drivers logged less than half of their mileage on Uber.

These facts suggest that even most long-time drivers primarily use their vehicle off Uber and aren’t full-time drivers, reinforcing that they would own their vehicle whether driving on Uber or not. Given that, we focus on drivers’ variable costs.

Let’s see how the 64 cents breaks down between fixed and variable costs:

Removing pure fixed costs knocks off 14 cents. The most egregious of these line items is the cost of a cell phone. They attribute the entire cost of owning a cell phone — almost $1,500 annually — to driving on Uber. While other studies have accounted for the cost of additional data, it’s unthinkable that most drivers would go without a cellphone but for Uber.²

But by far their largest cost category is “Vehicle acquisition,” estimated by dividing monthly loan payments by mileage. Their estimate is so high because they treat drivers’ vehicles as if they have no value as assets. In other words, if a driver buys a car for $20k, the authors treat that driver as having lost $20k, ignoring the fact that the car retains value and could be resold. A valid cost analysis would look at the difference between the purchase and resale price, which is why every major vehicle consumer cost site — AAA, Edmunds, KBB, etc. — reports on vehicles’ depreciation and financing costs, not their sticker price. And, in fact, vehicles depreciate due to both age and usage. The age-based portion is fixed, since vehicles lose value to age whether they’re used or not. Correcting their estimate to include only variable depreciation reduces their estimate by another 24 cents.³

Altogether these fixes reduce the authors’ estimate by 36 cents, resulting in a marginal cost of driving on Uber of 26 cents. Study after study have found expense rates in the same ballpark:

• Anderson Economic Group finds costs of between $0.33 and $0.37 per mile, even after accounting for a share of fixed costs for “part-time” drivers and all fixed costs for “full-time” drivers.
• Zoepf et al. report costs of $0.30 per mile for the median US driver, using a conservative estimate of MPG and including some fixed costs.
• The RideShareGuy finds variable costs of $0.195 per mile for a Toyota Prius in California, a popular vehicle among high-mileage drivers on Uber.
• Researchers at Cornell find marginal costs of $0.19 per mile for Seattle drivers.
• BW Research estimates marginal costs of $0.258 per mile in Massachusetts.

The authors might note that their 64 cents is close to the IRS’s 2024 standard mileage rate of 67 cents per mile. Unsurprisingly, the IRS rate is similarly overestimated. It includes “vans, pickups, [and] panel trucks,” all uncommon on Uber; it includes fixed costs; and it fails to account for high mileage.⁴

Benefits

In addition to inflating driving expenses, the report overstates the cost of driver benefits. First, the authors stipulate that Minnesota drivers ought to be eligible for paid leave, health insurance, retirement savings and unemployment insurance–despite the fact that Minnesota employers are only mandated to provide two out of the four. For example, Minnesota employers are required to make a “Secure Choice Retirement Program” available to employees, but are not required to contribute to it. Similarly, only full-time employees are eligible for health insurance contributions by their employer; whereas the majority of rideshare drivers would not qualify as full-time (as pointed out above and in the state’s report).

Second, the report estimates the cost of various benefits based on national data for full-time workers, seemingly in the category of “Transportation and Material Moving Occupations.” This includes jobs as wide-ranging as commercial pilots, flight attendants, railroad workers and taxi drivers.⁵ These cost estimates have little to do with the empirical costs of providing benefits in Minnesota, especially given the part-time nature of most drivers’ work on Uber.

For example, Minnesota’s state-wide “Earned Sick and Safe Time” (ESST) requires that employees (not independent contractors) accrue one hour of sick and safe time for every 30 hours worked, suggesting a cost of the benefit of up to 3.33% of pay. Compare this to an estimate of paid leave at 9.30% of wages using the report’s methodology, which includes not only ESST but various benefits that are currently not required in Minnesota. Or, consider health insurance estimated at 12.6% of wages and applied to all drivers, when only a small share of drivers would currently qualify as full-time and therefore be eligible for such a benefit. In sum, if Uber were required to provide a number of relevant benefits, we estimate that those benefits would cost a fraction of the approximately $4.55 per hour, or 30 cents per mile when transporting a passenger, that are estimated in the report.

Upshot

Why does it matter that DLI’s report overestimates expenses and the cost of benefits? Because over-action will create a standard for driver pay that greatly exceeds the minimum wage guaranteed to employees, and will have harmful consequences: significantly higher prices for Minnesotans. When the price of rideshare increases fewer customers want to or can afford to order rides. The starker the price increase, generally, the starker the reduction in demand for rideshare and opportunity for drivers.

We estimate that the pay standard will increase labor costs by roughly 20–40% in the Twin Cities and 15–25% in Greater Minnesota (for base and comprehensive rates, respectively). This is a larger change than estimated by the authors of the report, who expect that earnings would increase by ten percent (Twin Cities) or 17 percent (Greater Minnesota) under the base rates. An important difference is that the authors assume all trips can be priced differently under the pay standard, whereas we assume that historical earnings were required to get trips fulfilled, meaning that Uber could not price trips lower even if the new pay standard allowed for it.

Higher labor costs mean more expensive rides. In contrast to the report’s claims, rideshare companies can’t simply absorb increasing labor costs no matter the size. In fact, Uber’s take — after expenses like insurance costs — is currently less than the increase in labor costs caused by the report’s base rates. As a result, without raising prices Uber would have to choose between operating at a loss on Minnesota rides or shutting down its operations there.

Higher prices mean lower demand. While the report conveniently focuses on the short-term impact of price increases, academic research — including a paper cited in the report⁶ — shows that riders are more elastic in the long run, taking fewer and fewer trips as they adjust to the high prices by traveling less and finding alternatives to rideshare. Not only would this hurt riders, but drivers would enjoy less demand. Drivers would earn more per trip, but those earnings would be offset by longer waits between trips. The end result is that drivers who stick with rideshare would likely take home about as much as they did before the change.⁷

These dynamics aren’t just theoretical. After the introduction of Seattle’s earnings minimum, trip volumes since Covid have recovered about half as fast as in the rest of the US, and earnings per hour online are among the lowest in the country. And counterintuitively the rate increases hit Seattle’s low-income riders the hardest, as they depend on Uber for essential transportation. Minnesota’s policymakers should have no reason to expect that their own earnings minimum would play out any differently.

Uber is committed to working together with drivers and policymakers to figure out a minimum payment standard that ensures minimum pay, protects drivers’ flexibility and keeps ride-sharing affordable. Looking at data from Minnesota is a step in the right direction, but the State must pay close attention to how the study’s authors determined expenses and benefits before implementing a pay standard.

Notes

1. Coincidentally this is right around the Uber mileage assumed by the authors for a full-time driver.
2. Some drivers may have a second phone specifically for Uber. While a phone is essential for driving on Uber, a second phone is not.
3. We estimate variable depreciation using 2023 AAA data for a medium sedan, a common vehicle type on Uber, following the methodology here.
4. The IRS does not publish the mileage basis behind their standard rate, but Motus — the company whose data is upstream of the rate — notes that “businesses that rely on the IRS rate to reimburse mid- and high-mileage workers are likely providing reimbursements that do not reflect actual driving costs.”
5. BLS Occupational Outlook Handbook: Transportation and Material Moving Occupations
6. Castillo, Juan Camilo, Who Benefits from Surge Pricing? (2023)
7. Hall, Horton & Knoepfle (2023) finds that earnings per online hour re-equilibrate following price increases. In the long run, earnings may even decrease slightly following such price increases, but the corresponding estimate was not significant.