The Dark Side Of The Economic Behind Ride Sharing Services

The devastating impact of the rise of Uber on Taxi drivers and what we can learn from it

Photo by Jorge Salvador on Unsplash

Every innovation that disrupts entire industries will be definition create winners and losers.

Over the past decade, one of the clearest examples of industry disruption is what the rise of ride-sharing services like Uber and Lyft had on the Taxi industry.

In this article, I review research that details how this disruption has impacted Taxi drivers and what we can all learn from this experience—as all of us could experience similar financial losses at any point.

Medallion Capitalism: The Economics of Taxi Licensing

If I learned anything from this paper, it’s that the economics of the Taxi industry are strange and complicated.

In Melbourne, taxi licenses were regulated by the state government, which controlled the number of licenses issued. This scarcity made the licenses highly valuable assets.

At their peak, a single taxi license could be worth as much as $500,000. The limited supply created a high demand, driving up the value of the licenses over time.

That is a massive investment, but the owners of these licenses were able to lease their license to anyone who wanted to drive a cab for around $30,000 per year, Making it an investment with a 6% annual yield. This made licenses an attractive investment and even a key pillar of retirement income for taxi drivers.

This license was the key to a taxi driver’s lifetime income—allowing them to earn a living driving and then partially fund their retirement.

So long as the licenses had value, taxi drivers had a stable and predictable financial future.

However, the rise of rideshare platforms like Uber changed changed everything.

Uber and similar services offered cheaper, more convenient alternatives to traditional taxis, and their rapid growth was facilitated by changes in regulatory frameworks.

The state government eventually deregulated the taxi industry, making it much easier and cheaper to operate a rideshare vehicle.

In Victoria, for example, rideshare drivers could register their vehicles for an annual fee of just $55.10, with no restrictions on the number of registrations.

So, Imagine you are a Taxi driver who invested $500,000 for the right to drive people around town—and then just like that, an Uber driver can register their vehicle for what it costs to fill up their car with a single tank of gas.

This deregulation led to a massive increase in the number of rideshare vehicles, effectively rendering the once-valuable taxi licenses worthless.

For taxi license owners, this meant that their significant investments plummeted in value almost overnight.

The government offered minimal compensation in the form of transition payments, which many felt were inadequate compared to the losses they incurred. This financial blow was compounded by the emotional and existential impact, as these people had to cope with the loss of what they had seen as a secure investment and a stable future.

So, that’s the background. Now, let’s talk about what this research is able to tell us about how that kind of sudden financial loss impacts a person.

The human toll of rapid innovation

The researcher, David Bissell, gathered his data through fieldwork in Melbourne. He interviewed eight taxi license owners.

Eight drivers are a small sample size, but this allowed him to have lengthy discussions on how they emotionally and mentally dealt with losing their investments and livelihood.

To get a real sense of what these taxi license owners went through, Bissell used a qualitative method called impressionistic vignettes. This means he shared detailed, narrative stories from the interviews to paint a vivid picture of each person's journey through loss.

Instead of just presenting cold, hard facts, he captured the rich, emotional, and existential aspects of their experiences. This approach helps us understand not just the financial impact but also the profound personal and emotional toll of such a loss.

In essence, the paper is about more than just money. It’s about how losing financial investments affects people's lives, their sense of self, and their trust in institutions. It’s a deep dive into the human side of economic disruption, showing how intertwined our finances and emotions can be.

The study uncovered three major themes in the experiences of taxi license owners who faced financial loss due to the rise of rideshare platforms like Uber.

Loss of Faith in Institutions

Drivers expressed a profound loss of trust in government and regulatory bodies, feeling that the state had betrayed them by allowing rideshare platforms to disrupt their livelihoods without compensation.

They perceived the government as corrupt and accused it of being influenced by rideshare companies like Uber.

Selina, one of the interviewees, described her intense anger and feeling of betrayal by the government, highlighting the lack of political and media support for their cause.

Loss of Face and Public Respect

The drivers reported feelings of public humiliation and loss of respect.

When a cheaper, more convenient option like Uber came along, people flocked to it and never went back to using traditional Taxis. There was not a whole lot of public sympathy for cab drivers, who were perceived by many as standing in the way of a logical and inevitable new economic system for driving services.

Taxi drivers who protested the changes felt stigmatized as "greedy license owners" by the media and the public.

Brad, another driver from the study, recounted how he had to resort to giving free rides and buying drinks for his customers to maintain their patronage, which he found deeply humiliating (and unprofitable.)

Loss of Conviction and Vitality

Many drivers expressed a sense of hopelessness and inability to move forward with their lives. They felt mentally and physically drained from years of struggling to reclaim their financial stability.

Mary, a driver who was interviewed, shared her disappointment in not being able to fulfill her late husband's wishes to use their investments for charitable purposes, expressing a deep sense of personal failure.

An Important question you should ask yourself

“How closely connected is your income to your financial wealth?”

Or, put another way, what are the odds of losing both your income and your life savings at the same time?

The emotional impact of that type of financial loss is large and complicated.

Losing a significant amount of money can be a traumatic experience.

It’s especially painful when there is a 100% correlation between your income and your wealth.

Imagine you worked at a company that provided you with enough income to live a comfortable life. You believed in your company and invested all of your net worth—about $500,000 in company stock.

Then, one day, it was discovered that the executives at your company were engaged in massive fraud, and the company went bankrupt.

In the blink of an eye, your income and net worth drop to zero.

That’s the experience that many of the cab drivers experienced as Uber and Lyft began dominating the local taxi markets.

I have written about a semi-unpopular opinion for years that you should make every effort to minimize the correlation between your income and your wealth.

• Real estate agents shouldn’t invest in local rental properties

• Stockbrokers should have a lower allocation to equities

• Workers should not buy (much) company stock

I often get pushback on this idea because investing is complicated and scary, and people tend to fall back on ‘investing in what they know.’

But if investing in what you know puts you in a situation where your income and wealth can be completely wiped out, it’s a very dangerous investment strategy. People have a tendency to hand-wave those concerns away, believing that the worst will never happen.

But when the worst-case scenario does happen, in addition to financial hardship, you can expect a lot of anger, shame, and a sense of betrayal—which is exactly what this research found in the interviews with the Taxi drivers.

---

Stay tuned. In the very near future, I will be writing about research on recovering from a devastating financial loss.

---

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.