How Germany's Ban on Uber Hurts the PoorBy
Earlier this month, a court in Frankfurt ruled that the ride-sharing company Uber could not continue to operate in Germany. Uber was found to be in contravention of the country’s Passenger Transport Act, which mandates a permit to transport people commercially. The decision is the first nationwide ban on Uber and a setback to the company’s expansion plans in Europe.
It also points up one of the most insidious ways we perpetuate inequality and keep poor people poor. Too often, governments regulate services and demand expensive qualifications that prevent people from opening up new enterprises and regulate housing so they can’t afford to live where the jobs are. If we want poorer people to get richer, we have to give them a chance. Instead, we’re regulating them out of opportunity.
Uber is hardly a utopian solution to inequality—it makes considerable overhead for running a souped-up dispatch service and can cut off drivers at whim. But the company has addressed most of the legitimate concerns about its business—passengers know who is driving them, that those people are generally reliable, and that the price will be fair. And whereas the costs to join Uber as a driver include a reasonably new car, $10 a week, and a share of fares that ranges from 5 percent to 20 percent, that’s a far lower barrier to entry than the existing licensed taxi system in many cities around the word. The latest set of New York taxicab medallions for individuals went for as much as $965,000. The average net worth of families in the bottom quarter of the wealth distribution in the U.S. was negative $13,000 in 2010. It seems unlikely many of those families bid for a medallion.
It isn’t just the taxi industry—across a range of businesses, from construction to hairdressing, regulation has the effect of favoring the better off. Take dentistry: Morris Kleiner and Kyoung Won Park find (pdf) that hygienists in the U.S. who work in states where they are allowed to be self-employed earn 10 percent more than in states where, by regulation, they have to be employed by a dentist (meanwhile, dentists earn more where hygienists have to work for them).
Deregulation, on the other hand, has been shown to benefit the poor. In 2005, Portugal scrapped many of its official procedures around incorporating a new business. It reduced the time taken to complete legal incorporation from months to hours and the cost from €2,000 ($2,592) to €400. Lowell Taylor at Heinz College and some of his colleagues looked at the impact of the reform (pdf) on entrepreneurs. The reforms led to more business creation and a modest increase in the number of jobs—seven new jobs per 100,000 people in the country per month. The impact was largest among companies started in low-tech sectors, such as retail and agriculture, and among entrepreneurs who were less educated—suggesting poor people benefited more, even if most created small, low-productivity enterprises as a result. Similarly, simplifying business registration in Mexican municipalities increased registration (pdf) 5 percent and wage employment 2.2 percent, mainly because previous wage employees set up enterprises to compete with incumbents—who saw their profit margins fall.
Overregulation of land also has a disproportionate impact on the poor. According to research (pdf) by John Quigly at UC Berkeley, land use regulation in the San Francisco region plays a considerable role in pricing poor people out of areas where employment opportunities are. General construction projects, for example, face numerous independent public reviews. Reduce the number of those reviews by three, and the price of housing would drop 14 percent. A number of areas where good jobs are concentrated, such as Palo Alto, are particularly restrictive on land use. Reduce the number of reviews there, and average house prices would drop closer to 30 percent.
And that doesn’t even fully account for the impact of such regulations as minimum plot sizes or maximum occupancy rules. In Los Angeles, the requirement that apartment buildings contain a minimum number of parking spaces reduced conversions of old buildings into new apartments and raised the cost of new construction. Both factors drove up the price (pdf) of apartment rentals and condos in the city.
Regulating against the poor is not a problem unique to rich countries. The relative regulatory burden on small entrepreneurs, for example, tends to be even worse in developing economies (and the burden of enforcement considerably more capricious). Many countries demand minimum capital requirements before you can register a business, but the size of such deposits is a larger percentage of average incomes in poorer economies. In high income countries of the OECD, the average deposit is equal to about 10 percent of gross national income per capita (pdf). In Sub-Saharan Africa, the average deposit is worth considerably more than annual average incomes.
And even regulation that’s specifically meant to help the poorest in developing countries can backfire if poorly designed. In 1986, India banned child labor. According to research (pdf) by Prashant Bharadwaj at UC San Diego and colleagues, the impact of that ban was to increase child labor rates. Families with children in the labor before the ban were desperately poor; they needed the income to survive. But the ban depressed child labor wages. So after the ban, families just sent their kids out to work more. Similarly, minimum wages set too high relative to average wages can deter employers from hiring low-wage workers (pdf). (The U.S. appears to be some distance from such a concern).
Regulations play an important role in protecting consumer safety, enforcing workplace standards, and ensuring that landlords can’t abuse tenants. We need environmental and economic regulation to control polluters and monopolists. But by banning Uber, Germany is simply enforcing a cartel of incumbents at the cost of consumers and potential new providers, and that is a force for perpetuating inequality. Too much regulation worldwide has the same effect. It’s time to level the playing field to help poor people compete.