April 12, 2016

Fixed wages in the public transportation segment?

It often appears like taxi, jeepney and bus drivers drive for their lives: they weave in and out of traffic changing lanes and they stop in the middle of the road to load and unload passengers; and in many cases this is quite close to the truth. Many public utility drivers are not paid fixed wages but earn only after they have met their daily quota (called boundary) which is paid to the vehicle owner (the capitalist).

The public transport system in the Philippines is a great case study of free market economics gone wrong. In many ways, this free market system works like how any free market system is supposed to work, albeit with some government controls in place. Like many free markets, competition is fierce and barriers to entry are relatively low. Theoretically, this should push prices down (or up) for consumers until the equilibrium between supply and demand is found.

Perpetual traffic congestion and an inefficient public transport system. This is now considered normal by millions of Filipinos in Metro Manila

The impact of the quota system

However, in the Philippines, transportation price is fixed by a regulation board called the Land Transportation Franchising and Regulatory Board (LTFRB). In economics, this form of government intervention, the setting of a maximum price, is called a price ceiling. Price ceilings become a problem when the price set is below the equilibrium price, which is what many transportation groups claim it to be. Going back to theory, this means that supply should fall as transport groups start pulling their vehicles off the road for lack of financial incentive. This is where theory and reality start to diverge.

Except for instances when transport groups call for day-long strikes and pull their vehicles off the road, in reality, many drivers cannot afford to pull their vehicles off the road due to the need to earn a living. Vehicle owners don’t have any incentive to pull their vehicles off the roads because, they compensate for the price ceiling by using the daily quota system to ensure constant revenues. In effect, they take advantage of the financial situation of the drivers, many of whom do not have a better means of making a living. So long as there is a driver willing to drive their vehicle, no matter if the vehicle is without the proper permit (illegally on the road aka colorum) or poorly maintained, they earn. The current system incentivizes capitalists to keep any and all assets on the road.

Drivers accept the imbalance and the number of vehicles stays above the equilibrium point resulting in too many poorly maintained public vehicles on the road, drivers who driver recklessly to pick up as much passengers as they can as fast as they can and an overall inefficient public transport system.

The case for a minimum wage

One particular VP candidate in last Sunday’s debates proposed fixed wages for public transportation drivers to help address the traffic woes ailing Metro Manila.

In economic theory, having fixed wages or a minimum wage is the government setting a price floor for the services provided by drivers. This price floor will be above the equilibrium price or what drivers are currently earning today on the average, otherwise there is going to be little incentive for drivers to accept such a proposal. For vehicle owners, this increases their overhead costs and their demand for drivers should go down, in theory.

End result: vehicles on the road should start to go down as capitalists try to find the balance between the increased overhead costs and the disappearance of their consistent revenue stream. There is also a possibility that the number of public vehicles on the road goes down to the level that results in an overall shortage of public vehicles to service Metro Manila.

What can happen?

It’s hard to know if this will indeed be the actual result. A book I’m currently reading on Behavioral Economics (Misbehaving by Richard Thaler) talks about how human motives and human behavior tend to be different from how economists think in their models.

For instance, some drivers may opt to maintain the quota system if the minimum wage is below what they currently earn or some owners may opt to find a loop hole that will allow them to skirt minimum wage (think contractual employees without regular benefits). This creates a two-system market that both sides can look to manipulate and exploit for their own personal gain.

Some other things to consider

My analysis above also fails to take into account some factors like the number of operating permits the government issues. In some countries, this has proven to be a good way to regulate the market. It helps ensure that only properly maintained public vehicles are on the road. It’s also a great way to keep the overall number of public vehicles controlled. If a secondary market for permits develops, this can also give vehicle owners additional incentive to either enter or exit the market.

In addition, the above may not be enough to completely answer the traffic woes we currently have. At best, it will help make efficient an inefficient component of the equation. However, the overall capacity problem still needs to be answered and decongestion via relocation of the national government or by development of alternate means of mass transport should still be on the table.

This is by no means an exhaustive analysis but rather I hope this becomes just a conversation starter or something to think about -- for our leaders running in the upcoming elections and for voters selecting their preferred candidates.