The Value of Econ 101, example #10,191
Some people insist “Econ 101” is too simplistic to be valuable for real-world decision making. While Econ 101 is, of course, less than all-encompassing, I would still say that the world suffers from far too little application of basic economics than too much. As is often the case, a ready example was recently provided by progressive legislators in the city of Seattle.
Not long ago, a new ordinance was passed in Seattle seeking to boost the wages of food delivery drivers who use apps like Uber Eats or DoorDash. It was couched with all the usual rhetorical flourishes about “fair and livable wages,” but it was just a form of price controls. And the effects of price controls aren’t changed by rhetorical flourishes.
Basic economics tells us that when the price of a good or service is artificially pushed up, we should expect to see a decrease in the quantity of that good or service demanded by consumers. This is sometimes too hastily phrased as “decreasing demand” but that’s not right.
Price floors (including wage floors) don’t decrease demand; they decrease the quantity demanded. This seemingly minor terminological quibble describes an important difference. Demand refers to how much consumers want some good or service, and quantity demanded refers to how much of that good or service they are willing to buy at a given price. The reduced consumption that occurs after a price floor has been implemented isn’t happening because consumers have started wanting less of the service – they still want it just as much as before, but they’ll be getting less of it anyway. This is partly why changes in quantity supplied or demanded due to price controls represent a deadweight loss – because those changes aren’t driven by changes in the preferences and demands of consumers. There are potential gains from trade that will never be made, without anyone benefiting from those losses.
And of course, the insights of basic economics were right on the mark. Once the new ordinance took effect, citizens noticed that ordering food was suddenly becoming much more expensive and started doing it much less – or deleting their food delivery apps altogether.
Of course, how much impact a price control has also depends on things like the elasticity of supply or demand – that is, how responsive producers or consumers are to price changes. And in this case, it looks like the demand for food delivery drivers is highly elastic – the price increases have led to a large decrease in the quantity demanded. Many food delivery drivers have spoken up saying the new ordinance is backfiring and as a result they’re making less money than they did before.
Part of that is because fewer people are placing orders for delivery. But another part is the other side of wage controls – while they will decrease the quantity of labor demanded, they also increase the quantity of labor supplied. That is, when people see an ordinance mandating higher wages for delivery drivers, more people will enter the delivery driver market while at the same time fewer people will want to avail themselves of delivery driver services. As a result of this double effect, more drivers are sitting around hoping to catch a smaller quantity of orders – which decreases the odds of any given driver being able to get such an order. As one driver put it in the second story linked above:
“They’re not telling the whole story,” Shagen said. “Assuming that you are working constantly, then yes, you’re going to be making that much money. But that’s not what’s happening right now. Because people are not ordering as much anymore. The tips are going down because they think we’re making all this money.”
One driver shared how much he made on this week last year: $931. But this week, he only made $464.81.
Lardizabal said their “bread and butter” is often South Lake Union, near Amazon. But KING 5’s visit to the area Sunday resulted in several conversations with bored delivery workers who reiterated their wages have been slashed.
On top of that, Lardizabal and others told KING 5 they believe they are competing against more drivers now.
“Everybody in cars, planes, trains, automobiles, mopeds are converging on the city,” Lardizabal said. “We’re grinding. And we are for real not getting $26 an hour.”
Anyone who had taken even a single introductory course in basic economics (and actually retained what they had learned) would have immediately predicted all of this. Unfortunately, there appear to have been no such people among Seattle policymakers. And no matter how many times we see this story play out, we see the stage being reset for yet another performance over and over again. For all its simplifications, a world that took Econ 101 seriously would be a massive improvement over what we have right now.
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