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.
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| 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.