Intertemporal Elasticity of Labor Supply for Taxicab Drivers: Evidence Using a New Instrument

• In Event: Beyond Wages: Worker Choice, Autonomy, and Wellbeing in Flexible and Nonstandard Work

Abstract

Abstract
Understanding how workers respond to temporary wage increases is a foundational question in labor economics with direct implications for overtime regulation, minimum wage policy, and the design of gig economy platforms. A central debate in this literature concerns whether workers with flexible schedules behave as neoclassical optimizers — working more when wages are high — or as income targeters who quit early on productive days once a daily earnings goal is met. Resolving this question requires credibly exogenous variation in wages, which prior studies have struggled to achieve.

This paper estimates the intertemporal elasticity of labor supply for New York City yellow cab drivers using a novel instrument: the type of taximeter installed in the vehicle. Two vendors — VeriFone Transportation Systems (VTS) and Creative Mobile Technologies (CMT) — supply taximeters to NYC taxis. Both calculate fares identically, but they display different default credit card tip options to passengers. VTS suggests higher tip percentages (20, 25, and 30 percent) than CMT (15, 20, and 25 percent). Because passengers disproportionately select default options, drivers operating VTS-equipped taxis earn systematically higher tips through no effort or choice of their own.

The data come from all NYC yellow cab trips completed during 2010, organized into approximately 6 million driver-shifts across roughly 35,000 drivers. Crucially, drivers do not select their taximeter — they are assigned whichever vehicle is available when they begin a shift. To validate this claim, we document that aggregate VTS and CMT market shares remain stable at approximately 50-50 throughout the year, that individual drivers exhibit lock-in or switch away from VTS rather than toward it, and that fare earnings are statistically identical across taximeter types while only credit card tip earnings differ.

We estimate a log-log labor supply model with driver, date, and hour-of-day fixed effects, instrumenting log hourly wages with an indicator for VTS assignment. This strategy isolates wage variation generated by taximeter assignment from confounding sources including demand shocks, driver fatigue, and classical division bias. The first-stage F-statistic of 31.99 confirms instrument relevance: VTS assignment increases total hourly wages by approximately 0.5 percent, driven entirely by a 7.4 percent increase in credit card tip earnings.

The instrumental variables estimate indicates that a 1 percent increase in hourly wages leads to a 1.6 percent increase in shift duration. This positive and statistically significant elasticity is robust to restricting the sample to renters only and to dropping baseline covariates entirely. Results are inconsistent with income-targeting behavior and support the neoclassical prediction that workers with schedule flexibility substitute labor toward higher-wage periods.

These findings carry practical relevance for the growing gig economy. As platform-based work — ridesharing, delivery, freelancing — expands the share of workers who control their own hours, understanding within-day labor supply responses becomes increasingly important for designing wage floors, surge pricing mechanisms, and overtime incentive structures. Our results suggest that flexible workers respond strongly and positively to temporary earnings opportunities, reinforcing the case for incentive-compatible compensation design in flexible labor markets.

Author

• Vikrant Vilas Kamble, University of Delaware
  Presenting Author