Uber’s Tipping Settlement Will Reduce Earnings of African-American Drivers

This week, Uber reached a settlement with drivers in California and Massachusetts in a lawsuit concerning worker classification. In addition to up to $100M in compensation, recognition of a driver’s association, and greater transparency about deactivating drivers, the settlement permits drivers to post signage in their vehicles soliciting tips. Uber drivers could always accept cash tips, but unlike Lyft, Uber has never had an in-app tipping option, and emphasizes that “you don’t need cash…there’s no need to tip.” As a result, tipping is rare: Uber drivers estimate that between one and five percent of riders tip, versus 70% of Lyft customers (though some Lyft drivers claim 20–50%).

In a political climate focused on fair wages, tipping may seem like an innocuous solution to the gig economy, as adopted by Lyft and other services. However, if Uber’s pricing model works correctly, this move will be unlikely to increase average earnings, and research from the taxi industry suggests it will reduce earnings for black drivers who will be tipped less than their white counterparts.

Since Uber does not plan to add an in-app tip option, it’s unlikely to generate tips from 70% of riders, as Lyft claims. A 2014 Bankrate survey found that 40% of American consumers carried under $20 in cash, while 9% carried none at all. These fractions have surely grown, and are surely overrepresented among Uber users (a 2014 study found that 24% of millennials carried under $5 in cash). Tip solicitation will tax the few remaining cash-carriers not already accustomed to Uber’s previous abandonment of the custom. Five percent of fares may be a reasonable expectation of the new tip amount (for instance if 25% of riders tip 20% each).

Pressuring riders to diverge from an increasingly cashless society to tip (lest they suffer a poor passenger rating from their driver) will inconvenience users who have come to favor Uber’s easy transactions. But the greater impact will be on black drivers. A Yale study provides concerning evidence:

The authors collected data on more than 1,000 taxicab rides [by twelve drivers] in New Haven, Connecticut in 2001. After controlling for a host of other variables, they find….African-American cab drivers were tipped approximately one-third less than white cab drivers [no significant results were found for other ethnicities]…Both black and white passengers participated in the discrimination against black drivers.

This aligns with other research on tipping, such as a 2014 Cornell study finding that black servers were tipped ~10% less than white servers. Clearer norms around restaurant tipping relative to taxi tipping likely contribute to the stronger effect in the taxi setting.

Perhaps lower tips for black drivers are tolerable if tipping increases earnings for all drivers, but this is highly unlikely. While Uber says that it has no plans to reduce fares under the assumption that riders will tip, their dynamic pricing algorithm means that this will happen anyway. A review of their surge pricing explains why:

Uber uses an automated algorithm to increase prices to “surge” price levels, responding rapidly to changes of supply and demand in the market, and to attract more drivers during times of increased rider demand, but also to reduce demand…Surge pricing increases economic efficiency in two ways: 1. rising prices motivate more drivers to start driving, 2. when there are not enough drivers for everyone, the rising prices make only those customers accept a ride whose needs are highest.

For example, if more riders in rush hour want rides than drivers are available, fares might be 1.5x normal. If tips become more common (as is expected from this settlement) without fares being reduced, drivers will expect higher hourly rates and thus more will drive (driver supply rises), while riders will be less likely to seek Uber rides given their expectation of higher prices (due to tips). This means that surge pricing will be less necessary, surge multipliers will fall, and the resulting fall in fares will offset average tips. Even drivers who didn’t drive in surge periods would earn less in base fare, due to tip expectation reducing rider demand (e.g. these drivers may end up circling more). An economist might phrase this as: tipping changes neither the supply nor demand curves, so as long as Uber’s algorithm continues to set prices optimally, neither tip-inclusive prices nor tip-inclusive driver earnings will change, on average.

This on-average offsetting of tips by fare reductions ignores tip discrimination. Since black drivers are tipped less, their lost fares will exceed the average tip amount; conversely, white drivers would be expected to come out ahead. To illustrate: assuming $19/hour in earnings and a 6% tip rate as estimated above (5% of fares, adjusted for Uber’s 20% cut), we would expect $1.14 in average tips. We would also expect fares to fall by $1.14, either due to surge multipliers falling, more circling, or a mix. Given black drivers are tipped ⅓ less than white drivers and a driver population that is 18% black and 37% white, we would expect black drivers to be tipped $0.86/hour vs. $1.28/hour for white drivers. Adding back the fare of $19 — $1.14 = $17.86/hour, black drivers would earn $18.72 total, 2.2% less than white drivers’ $19.14 total earnings, or 1.5% less than their current $19 earnings. This may not seem like much, but it translates to full-time black drivers earning $870 per year less than their white counterparts. If Uber added in-app tipping and generated Lyft’s 70% tip rate, black drivers would be expected to earn 6.3% less than white drivers, or $2,500 per year.

Research from the restaurant industry has found other issues with tipping: it’s correlated to sexual harassment against waitresses (notable for the 14% of Uber drivers who are female) and corruption, and nearly uncorrelated to service quality. While this research hasn’t been replicated in taxis, it’s plausible that the trends extend to transportation.

Few deny that driving for Uber can be financially difficult, but introducing tipping creates more problems than it solves. Should it become the new norm, riders can reduce discrimination by tipping a fixed amount regardless of perceptions of service quality (which are prone to unconscious bias). The new challenges of the gig economy will not be solved by voluntary measures like tipping; instead they require bold action from society as a whole to expand the social safety net (I favor universal basic income, as is popular among technologists).

Despite this setback, much progress has been made in tipping reform, with nearly 200 restaurants having now abandoned the practice. While Uber’s stance on tipping thus far has protected black drivers from discrimination, permitting drivers to solicit tips weakens such protections. They should remove this clause from their settlement to ensure their platform provides unbiased financial opportunity for all drivers.

Update: Uber clarified in a blog post that “Tipping is not included, nor is it expected or required.” The piece also provides rationale for their stance on tipping, which includes bias and references studies listed here.

Economist. Founder and president of the UBI Center. Studied at MIT and UC Berkeley. YIMBY. Former Google data scientist.

Economist. Founder and president of the UBI Center. Studied at MIT and UC Berkeley. YIMBY. Former Google data scientist.