Monday 22 February 2010

"We are all expert economists now" *

Stumbling and Mumbling starts off a post with this:

What’s the difference between high earners and New York cabbies? This question is central to the issue of whether the new 50% tax rate will actually raise revenue.

I ask it because of this new paper (early version here) by Orley Ashenfelter and colleagues. They studied how New York cab drivers changed their labour supply in response to the higher incomes caused by fare rises. And they found a negative elasticity, of around minus 0.2. That means a 10% rise in cabbies’ revenue per mile caused them to work 2% less.

This means we have a backward-bending labour supply curve, because the income effect outweighs the substitution effect...


I can only read a blog post as far as the first error (grammatical, logical or factual), so I left the following comment:

"they found a negative elasticity, of around minus 0.2. That means a 10% rise in cabbies’ revenue per mile caused them to work 2% less."

How do they know that this is not the quantity demanded dropping by 2% in response to a 10% fare hike? Unless they can prove that it was income-substitution rather than a fall in quantity demanded, the whole theory falls flat on its arse.


* Post title nicked from The Fat Bigot

5 comments:

Dr Whatson said...

1.Miles driven is used as a proxy for hours worked.
2.Revenue/mile driven (with or without a customer) takes into account changes in quantity demanded.
3.Therefore, if the fare increase is (say) 15%, revenue/mile(wage)may only increase by (say) 10%.
4.Like the paper says, a simple natural experiment.

Rather disappointing from a blog I rather like :(

Mark Wadsworth said...

Dr W. That is not what S&M said. The only two hard facts he quotes are:
1. a 10% rise in cabbies’ revenue per mile
2. they worked 2% less.

Revenue per mile driven does not 'take into account changes in quantity demanded', because revenue per mile driven is THE PRICE and says nothing about the total number of miles driven.

Dr Whatson said...

1.Assume the demand for cabs is fairly inelastic.
2.Therefore, (say) a 10% increase in the cab fare (set by the NY Taxi Licensing Commission) will decrease quantity demanded by 5%.
3.An hour of driving around after the fare change will bring 5% less customers paying a price increase of 10% (ceteris paribus).
4.Therefore revenue/hour goes up.
5.Therefore revenue/mile goes up (assuming the cabbie haunts the Manhattan boulevards and not the line outside the Waldorf).

Maybe you're mistaking miles driven for miles driven with a paying passenger?

Cabbies make a good case study because they can change their labour supply after a change in wages without changing jobs. Same as Swiss bicycles couriers, the subject of another famous paper.

Anonymous said...

I'm sorry, I didn't get further than "logical of factual". I'm sure you made a fascinating point at the end though.

Mark Wadsworth said...

Anon, well spotted, I have amended.