EC966 – Assessment 2 – Essay – 2018-2019

Assessment 2: Research-informed policy note

EC966 – Labour Economics

Answers will be precise and concise (while remaining grammatically correct). The number of words for the answer is limited to 1,000 words (please include a word count).

You have been hired to advise the government of a middle/high-income developing country. The government has an issue with the labour market of taxi drivers. Traditionally, taxi drivers are employed by companies. Companies own the cars and taxi drivers have labour contracts with the companies. The monthly wage has a fixed component, and part of it is linked to performance. To fix ideas, on average, 30% of the final wage is performance-driven. Taxi prices are regulated and depend on cities. Taxi licences are also limited at the city level; these are quite expensive and are owned by the companies.

Now, for a couple of months, a company called “Erub” has settled into the main cities of the country. Erub is essentially a marketplace that facilitates the matching between customers and taxi drivers, based on a clever algorithm. Erub fixes the prices and proposes fares that are very competitive compared to traditional taxis, but increases when there is more demand than supply. Erub charges around 30% as service fee on the price of the ride. For Erub drivers, lower prices may be compensated by the fact that they get a more steady inflow of customers. To become an Erub driver, one has to create a simple one-person company (which is not so difficult in this country), and to own/rent a car that is good enough.

There is a disagreement between government advisors about the right stand on the issue, and even on the potential economic effects of Erub. Some advisors claim that low prices will improve consumers’ welfare and that the government should not intervene. Others argue that the effects on the labour market should be primarily taken into consideration.

You have been hired to write a short and balanced policy note about the possible effects, positive or negative, of the entry of Erub on the drivers’ labour market. You’ll have to consider employment and wage effects on incumbent drivers and potential new ones. You can also mention the impact on the rent shared by different actors (taxi companies, drivers, and Erub). As the focus of the note is not taxes, you will refrain from any tax considerations. You will refrain from spelling out policy recommendations, unless those have obviously positive effects (on the labour market).

When drawing theoretical predictions, you should be precise about which theoretical framework you’re referring yourselves to. You should not use any equations in this note. However, you should use formal reasoning and precise academic references (authors’ names, year, and name of the journal if ambiguous). You can use up to 10 academic references for this note, choose the most relevant ones wisely. Vague and unjustified statements will be penalised, as will elements not directly related to the question.