Let’s tackle a really big problem. I call it the Pizza Delivery Driver’s Dilemma. Silicon Valley has weighed in on this. So has my alma mater, MIT. To say they don’t agree is an understatement. Recently, an MIT paper said that Uber drivers do poorly in net pay. Uber, in Silicon Valley, says their drivers get paid pretty well. They charge that MIT stands for “Mathematically Incompetent Theories.”
So which is it?
In fact, like most things, the answer depends on what you assume. Fortunately, I can truthfully say that I was working on this problem long before Uber existed— and years after I had learned that having gone to MIT doesn’t mean you’re always right.
The problem presented itself decades ago when my son Ollie started driving for a Dallas food delivery service, Dining In. The basic deal was that he would provide his car, gas and driving/delivery time. For that, he would be paid. He would receive an hourly rate from Dining In. And he would get tips from customers. Since he likes to drive and had a nifty little Mazda Protégé at the time, he thought it was a good deal.
Then he started telling me about his earnings. He was counting every dollar that came in as income. He wasn’t counting every dollar that went out.
“What about the gas for your car?” I asked.
“And what about the added miles on the car?
That’s when I built the “How Much Am I Really Making?” spreadsheet. To find the answer, you needed to answer four questions.
— How many hours did you work?
— What was your payment from the company?
— How much did you make in tips?
— How many miles did you drive?
Here’s an example. Suppose a driver does a six-hour shift at $8 an hour while driving 75 miles and earning $30 in tips. How does that work out?
Well, he’s got $78 in cash. That would seem like $13 an hour.
This year, however, the Internal Revenue Servicewill allow the driver to deduct 54.5 cents per mile as the cost for a vehicle used in business. That would subtract $40.88 from gross income. So the net income is $37.12. That’s just $6.19 an hour.
Quite a difference.
The American Automobile Association has a similar figure for the cost of driving. For 2017 its composite cost of driving, based on 15,000 miles a year, was 56.5 cents a mile. And the cost of driving a small sedan, which is what delivery drivers often drive, figured to 42.4 cents a mile. We could stop here and say, “Close enough for government work” but the AAA figuresare based on buying a new car, financing it and driving it for five years. That’s not what most people do.
Last week, on a quick trip to Domino’s, I didn’t see any new delivery cars. Similarly, my recent Uber rides were in cars that were likely recently purchased, but not new. Most people buy used cars, not new cars.
Does this matter?
You bet. For as long as I can remember, the AAA studies have shown that the largest cost of car ownership, by far, is depreciation. So it’s not surprising that the fastest way to reduce depreciation (and the cost of driving) is to buy a used car.
But we’re still not done.
People don’t buy cars just so they can drive for Uber, Lyft or Domino’s pizza. They already have cars. In Texas, you can’t leave home without one.
When they use the car to drive for delivery work, the cost is just for the additional miles. Auto leases are much the same: you pay a monthly lease charge, but if you drive over 10,000 or 12,000 miles a year, you pay a surcharge for the additional miles.
Triple A figures that the operating costs (fuel, maintenance, repairs and tires) for a small sedan are 14 cents a mile. The additional depreciation for 5,000 miles of added driving figures to 7.5 cents a mile.
Viewed this way, the driver loses 21.5 cent a mile if there is no reimbursement for mileage. So net pay changes again.
Going back to our example, you’d need to subtract $16.12 from that $78 in cash payments to net $61.88 or $10.31 an hour.
That’s quite a spread:
— Our driver is earning $13 an hour if we ignore the fact that he is part of providing part of an entire fleet, absolutely free, to the company that hires him.
—Or he is earning $10.31 figuring what’s called marginal costs.
—Or he is paid $6.19 an hour for tax purposes.
It’s all about the assumptions, with or without pepperoni, and whether you’re doing the math from Silicon Valley or MIT.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
(c) Scott Burns, 2018
On the web:
“Uber rejects MIT study that shows ride hailing…”, Levi Sumagaysay, the Mercury News, March 5, 2018
“AAA Reveals True Cost of Vehicle Ownership,” Erin Stepp, August 23, 2017
https://newsroom.aaa.com/tag/driving-cost-per-mile/
“Standard Mileage Rates for 2018 Up from Rates for 2017,” IRS.gov
https://www.irs.gov/newsroom/standard-mileage-rates-for-2018-up-from-rates-for-2017