Minimum Wages for Gig Workers Can’t Work

In 2017, I analyzed the Uber Tipping Equilibrium:

What is the effect of tipping on the take-home pay of Uber drivers? Economic theory offers a clear answer. Tipping has no effect on take home pay. The supply of Uber driver-hours is very elastic. Drivers can easily work more hours when the payment per ride increases and since every person with a decent car is a potential Uber driver it’s also easy for the number of drivers to expand when payments increase. As a good approximation, we can think of the supply of driver-hours as being perfectly elastic at a fixed market wage. What this means is that take home pay must stay constant even when tipping increases.

…If Uber holds fares constant, the higher net wage (tips plus fares) will attract more drivers but as the number of drivers increases their probability of finding a rider will fall. The drivers will earn more when driving but spend less time driving and more time idling. In other words, tipping will increase the “driving wage,” but reduce paid driving-time until the net hourly wage is pushed back down to the market wage.

A paper by Hall, Horton and Knoepfle showed that’s exactly what happened.

More recently, in 2024, Seattle implemented “PayUp”, a pay package for gig workers like DoorDash workers that required a minimum wage based on the time worked and miles travelled for each offer. Note that this is not a minimum wage for all workers but for one type of worker in a large market. For this reason, we can use the same analysis as with Uber tipping. The supply of workers is very elastic and essentially fixed at the market wage for workers of similar skill. Thus, we would expect a zero effect on net pay.

Here is a recent NBER paper by An, Garin and Kovak looking at the effects of the Seattle law:

We find that the minimum pay law raised delivery pay per task….At the same time, the policy led to a reduction in the number of tasks completed by highly attached incumbent drivers (but not an increase in exit from delivery work), completely offsetting increased pay per task and leading to zero effect on monthly earnings. We find evidence that drivers experienced more unpaid idle time and longer distances driven between tasks…Using a simple model of the labor market for platform delivery drivers, we show that our evidence is consistent with free entry of drivers into the delivery market driving down the task-finding rate until expected earnings return to their pre-reform level.

All of this is a general result of the Happy Meal Fallacy.