The taxi drivers’ guide to recession
You can tell when times are tough because you can hail a taxi. But there is more to this model of supply and demand than meets the eye.
Actually, the cab drivers’ test of recession is not how many shoppers there are but whether they’re carrying bags. No bags, nothing bought. Nothing bought - recession.
But why do the cabbies know this? Because they spend so many hours cruising the streets looking for a fare. And why so much time plying? Because there are so few fares.
Economic slowdown – as we must still officially call the recession – obviously means fewer people using taxis. It is as good as an example of discretionary spending as there is: if the alternative is buses or trains, or to go home before public transport ends, you do it.
So demand is down. But if there used to be 100 cabs on the road and 100 passengers (demand matches supply) what happens now there are only 80 people looking for taxis? Twenty cabs give up? No. On the contrary, the 100 cabs stay on the road longer to make up the cut in their income.
That means each driver doing 25 per cent extra hours, thinking 125 hours x 80 per cent demand returns them to their original 100 per cent income. Except that it doesn’t. It is possible that more cabs cruising the streets make a few people hail a taxi rather than find other transport, but demand doesn’t otherwise increase. So all that happens is cabbies work longer to pick up a similar number of fares.
But if it is futile to work extra hours, not spending longer on the road doesn’t work either. If they work the same hours they pick up only 80 per cent of their normal fares, so they are right to work longer, even if they do not gain on their past income.
Why is this an economic anomaly? Partly because taxi-driving is a capital-intensive occupation. A cab costs more than the drivers’ annual wage: he needs to keep it on the road to average down the fixed cost. In other trades, practitioners would drop out because of the low demand.
But it is also an anomaly because cabs do not cut their fares. If there is a recession, what should give is the price. Taxi drivers should be so desperate for business they will reduce their tariff, both to undercut their rivals and to bring their value to a point that the customers can still justify paying.
Fares are rigid however. That’s why we will take fewer cabs and why
taxi drivers will earn less money.
