The Unexpected Consequences of Wage Floor Laws For Gig Workers and Consumers

Wage floors for gig drivers are well intentioned, but policymakers should understand the consequences

As gig work has become more pervasive across the U.S., many labor advocates and gig drivers have pushed for wage floors. Legislation of this type requires Transportation Network Companies (TNCs) and/or Delivery Network Companies (DNCs) to pay a minimum wage to drivers.

Despite the well intentioned nature of wage floor legislation, these policies may result in unintended consequences that policymakers should consider, including:

1. Less work for drivers
2. Higher prices for consumers
3. Fewer earnings opportunities for people who want flexible work
4. Reduction of services outside the wealthiest & densest urban neighborhoods

New York City and Seattle Have Adopted Gig Wage Floors; More Places Will Consider Them

New York City and Seattle have already passed policies establishing minimum wages for app-based drivers.

In addition to these cities, Minnesota policymakers also considered a TNC wage floor bill in 2023. The bill closely mirrored the policies adopted by Seattle and New York City, and was vetoed by Minnesota’s Governor in May 2023.

Let’s take a closer look at each potential consequence of these wage floors:

1. Less work for drivers.

As a result of wage floors for gig drivers, more people will want to drive for TNCs and DNCs. Existing drivers for companies like Uber and DoorDash will face competition with new drivers and are likely to see a decrease in income.

During the public comment period in New York City, Uber described how competition between drivers will likely change with the new floor:

In November of 2022, New York City’s Department of Consumer and Worker Protection (DCWP) issued a report studying app-based delivery workers. The report indicated that the policy would result in a significant decrease in orders by roughly 15.6%. Fewer orders translates into less work for drivers.

A similar study by Charles River Associates (CRA) estimated that based on the current number of deliveries per hour, the reduction in orders could be as large as 31% — almost double the DCWP’s estimate.

In Seattle, drivers also experienced declines in work after the TNC wage floor went into effect. A 2022 analysis by David Kroman for the Seattle Times included comments from a driver who works on both Uber and Lyft platforms, who stated that the decrease in rides has led some drivers to work twice as many hours as before and forgo days off in an effort to compensate for the lost revenue.

2. Higher prices for consumers

Even city officials have acknowledged that wage floors are likely to increase prices for consumers.

So how do platforms address increased labor costs combined with narrow profit margins? They pass costs onto consumers.

Food Delivery Platforms Have Narrow Profit Margins, If At All

While apps like DoorDash and GrubHub grew in popularity during the early days of the pandemic, they have narrow profit margins per order. A Wall Street Journal article written by Preetika Rana and Heather Haddon in 2021 detailed the lack of profit for food-delivery apps:

Furthermore, Rana and Haddon note that DoorDash’s 2.5% margins were, “the best in the industry” in 2021. Driver earnings are a top expense for apps and, by definition, minimum pay legislation increases driver pay.

New York City’s DCWP report stated that apps may choose to increase prices for consumers in response to wage floors, estimating consumer prices would increase by 15%.

The CRA study criticized that estimate, stating that the DCWP overestimated the productivity of drivers. Delivery drivers currently average 1.63 deliveries per hour yet the DCWP estimates assume that drivers will complete 2.50 deliveries per hour, roughly 1.5 times the current delivery rate. The graph below compares expected price increases under each delivery per hour scenario.

Based on current rates of delivery per hour, prices for consumers would increase by $10.26 per order — almost double the DCWP’s estimate.

In addition to DCWP’s acknowledgement that consumers are likely to see price increases, platforms have also raised concerns over the downstream impact to consumers.

Doordash and GrubHub also filed a lawsuit in 2023, which argued that the proposed legislation would result in increased prices.

Analysis of similar policies, like commission caps, concluded that consumers would bear the additional costs.

Low Income Consumers are Particularly Harmed

Middle to high income consumers will likely be able to absorb the increase in price and continue using rideshare services. Low-income consumers are less likely to be able to afford price increases and have less access to other transportation and delivery options.

Uber’s testimony in Minnesota stated that higher prices will likely disproportionately affect low-income consumers. Uber cited similar concerns in an interview with Seattle PI reporter Callie Craighead:

While well-intentioned, wage floors are likely to increase prices for consumers.

3. Fewer earnings opportunities for people who want flexible work

Wage laws that count waiting time will benefit ‘power drivers’ while reducing flexibility for casual drivers. DCWP’s report for New York City explicitly states that, “these impacts will be disproportionately felt by workers whose engagement on the apps is the most casual.”

In response to the New York City’s proposed rule, DoorDash described the impact to casual drivers, who make up most of their workforce:

Why would platforms reduce flexibility as a result of wage floors?

Wage laws for delivery and rideshare drivers in New York City consider both miles driven and minutes traveled by drivers combined with a ‘utilization rate’.

The utilization rate aims to account for platform-wide productivity by comparing total active time on the app (time spent on deliveries or with passengers) to the total time drivers spent logged into the app.

As the utilization rate for the company increases, the per trip pay for each driver decreases- incentivizing platforms to reward power drivers at the expense of casual drivers.

New York City’s DCWP report states that “apps may directly incentivize productivity” as a response to the minimum pay requirements.

The incentives platforms face with utilization rates will likely result in platforms reducing the flexibility that delivery and rideshare drivers value.

GrubHub testified that the proposed policy would “virtually eliminate the very flexibility driver partners are drawn to”… “thereby slashing earning opportunities for thousands of New Yorkers”.

DoorDash stated in comments to New York City that the proposed rule would impose severe restrictions on delivery worker flexibility, and many workers may no longer be able to access earnings opportunities through the platform at all.

Many New York City constituents also opposed the policy, citing the flexibility of gig work as a way to earn additional income:

Flexibility is important to support families caring for the elderly and children with disabilities.

Flexibility is important for retirees working around doctor visits and supplementing retirement income.

Flexibility is important for students earning extra income to pay for college.

Polling of gig workers has repeatedly highlighted flexibility as one of the main reasons they use apps like Uber and DoorDash:

Further, Doordash’s 2022 Economic Impact Report provided an overview of the demographic makeup of ‘dashers’:

Again, while well-intentioned, these policies could result in reduced flexibility for the casual drivers, who are often women, people of color, drivers looking to supplement income, people suffering from chronic illness, and drivers using flexibility to take care of themselves or loved ones.

4. Reduction of services outside the wealthiest & densest urban neighborhoods

As a result of utilization rates, driver exit, and increased prices, the availability of services will likely decline. Any reduction in services will likely impact low-income and non-urban consumers the most.

Seattle expected fare increases as a result of the wage floor legislation, stating that, “The average fare from Rainier Beach to Downtown will go from $26 to $33.” Rainier Beach is considered the second-worst transit desert in the Seattle area.

If accessibility of transportation and food delivery is limited, it could further exacerbate the transportation inequity that already exists. People living in transit deserts are “‘in a significantly disadvantaged position” to access transportation, which can be critical for access to employment, healthcare, and food, according to University of Texas Professor Dr. Junfeng Jiao.

The New York City DCWP report also stated that platforms will likely “restrict delivery distances or limit services” as a result of the policy. The lawsuit filed by Doordash and Grubhub in New York City also states that wage floor policies will result in a limitation of services to some areas:

Uber’s testimony in Minnesota also described the reduction in access to residents in non-urban areas:

The concerns raised in Seattle, New York City, and Minnesota about TNC and DNC wage floors, describe potential unintended consequences for residents that rely on ridesharing and delivery services. Overall, these concerns highlight the importance of designing policy while considering variation across income groups and geographic areas.

As the policy debate over minimum pay standards continues, it is crucial to understand the potential downstream impacts to consumers and drivers.

Comments from drivers, platforms, and cities themselves shed light on the possible outcomes of implementing wage floors for TNC and DNC drivers. Adopting minimum pay standards could result in less work for drivers, increases in consumer prices, the loss of driver flexibility, and reductions in access to low-income and/or areas with less population density.

The bottom line? While platforms, drivers, and cities agree that driver pay is important, it is crucial for policymakers to seriously consider the potential unintended consequences.

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