Tuesday, January 22, 2013

European Notes: The Milan Taxi Industry

In Milan, as in New York and some other U.S. cities, the number of taxis is restricted by the local government; each one requires a permit, of which a fixed number are in circulation. In both cities the permits are transferable. In Milan, the price of a permit is more than a hundred thousand Euros; in New York it is a good deal higher than that—currently over seven hundred thousand dollars.

There is one striking difference between the two industries. In U.S. cities—certainly in San Jose, where I live, but I believe also in New York and other large cities—most cab drivers are immigrants. In Milan, they seem to all be natives. The explanation, I believe, is a difference in the regulatory rules and a resulting difference in the structure of the industry. In the U.S., the permits are mostly owned by cab companies, each of which employs multiple drivers, although in New York there are some that are restricted to owner operators. In Milan, no individual or firm is allowed to own more than one permit. The result is that the typical driver is self-employed, owning his own cab and his own permit.

Cab drivers in the U.S. are immigrants because it is a job that does not require a lot of qualifications or capital and pays better to people who work hard—are willing to drive many hours a day. But in Milan, the driver also has to have, or be able to borrow, something over a hundred thousand Euros to buy his permit, plus more money to buy his cab. That prices poor immigrants out of the market.

Self employment has attractions. But in this case, the rule that creates an industry of self-employed cab drivers also eliminates a major employment opportunity for poor people.


Robert Easton said...

Most immigration to Italy is from Eastern Europe, so there may be no obvious ethnic difference. When you say "In Milan, they seem to all be natives", are you judging this on ethnicity? You may well be right though; just suggesting it as another possibility.

Miko said...

I don't think your analysis in the last sentence is correct.

The Milan system proves (by its existence) that the capitalist control of the taxi industry in the U.S. is not of inherent benefit to the workers, since if it were it would be adopted in Milan even though they don't have the licensing requirement that causes it in the U.S.

The U.S. system proves (by its existence) that on-demand transportation is a desirable occupation for hard working members of the lower class.

So, we have one licensing requirement (in the U.S.) that punishes the poor by requiring them to turn over part of their pay as rent to a license holder and one licensing requirement (in Milan) that punishes the poor by making it more difficult for them to get such a job in the first place. Extrapolating, in a free market (in the FMAC sense of the word) we'd expect to see an industry of self-employed cab drivers which is also a major employment opportunity for poor people. As is typical of capitalism (in the FMAC sense), both rules are hurting the poor in some way, while neither rule is creating anything of value for them.

David Friedman said...

"since if it were it would be adopted in Milan even though they don't have the licensing requirement that causes it in the U.S."

I don't follow that. They can't adopt the U.S. system, because a cab company isn't permitted to operate more than one cab--only one permit to a firm.

Both Milan and New York have the licensing requirement--the difference is that in Milan a firm cannot own more than one license.

Michael said...

Of course, in London you have very onerous qualification requirements for drivers of black cabs. In order to drive a metered black cab, a driver must learn "The knowledge": essentially he must know every street and major destination in central London, and all the important routes between them. Learning this requires several years of study and testing. There is no formal restriction on the number of black cabs, but the qualification requirements mean that the number of drivers is restricted, and it isn't a job an immigrant can take just of the place. Drivers of black cabs tend to be native Londoners, and it is often a family occupation: the children of black cab drivers become black cab drivers themselves.

On the other hand, London also has a huge number of so called "minicabs". (The name is a misnomer: the vehicles aren't normally especially small). You cannot hail these on the street, but you may call them by telephone to come and pick you up, or book them over the internet. You may also walk into the office of the cab company and request a cab. (This is no particular problem, as there will be an office almost anywhere that you want to hire a cab from). These are not metered, but there will be a fixed price list and the prices are set by competition, making them lower than the cost of a black cab. These are pretty much invariably driven by immigrants. Traditionally, the advantage of black cabs was that the drivers knew where they were going, whereas minicab drivers did not, necessarily. With modern satellite navigation systems, this matters not so much, and it will be interesting to see how long the distinction between the two types of cab will survive.

Kefalas said...

In Greece individuals and not companies own the permits and owning multiple permits is allowed. In addition, almost all of the drivers are greek but very few of them driving the cabs are the ones who own the permits.

Kefalas said...
This comment has been removed by the author.
Tibor said...

Well, I can comment on the situation in Prague (and Pilsen in comparison).

There are a lot of regulations in Prague that have an effect on the market. First, there are licences without which you cannot have a taxi service (although you can have something similar to what Michael described as "minicabs" in London), and they cannot be sold or bought, only given or taken by the city. There is a fixed maximum price per kilometer for the taxi service and probably the worst thing is that certain places in the city (where the cabs can wait for their customers) are monopolized - the city allows certain companies to use them exclusively, while others are restricted. Also there are some requirements (on the car quality and such) that if met, the taxi service can get a special permit to use designated TAXI lanes in the traffic (although there are not that many of those in the city).

The result of this overregulation madness is cartelization of the market (which exceedes the legally designated areas as well...there were reports of violence between different cab services) and therefore high prices (exceeding the legal maximum, especially when they take tourists). Also the alternative taxis I mentioned (which are not regulated, or at least not as much) with fixed market prices are on the rise, so there is another parallel to London.

In Pilsen there are far fewer regulations and also far fewer problems. I think you still need a licence to have a taxi service, but there is no zoning or fixed prices like in Prague. The result seems to be a much better service (and a lot cheaper too).

Nightrunner said...

In other words, in Milan we have free economic agents, able to make decisions whether it makes sense for them to provide the service that includes the fixed license cost. In NY we have drivers who will never be able to acquire the license on their own and so are forced to work for low rates and squeeze the passengers for tips. Aren't we supposed to believe in the virtues of free markets?

David Friedman said...

To Nightrunner:

In Milan, economic agents are not free to decide to buy more than one permit and hire drivers. In New York, as in Milan, drivers are free to acquire the permit on their own, if they can afford it.

The former is less of a free market than the latter, since there is an additional restriction on the choices economic agents are permitted to make. It also results in less choice, since the option of driving a cab is in practice not available to those who cannot raise the price of a permit.

Ian said...

Milan has fewer immigrants than San Jose or New York, so it makes sense that there are fewer of them driving taxis.

Milhouse said...

The former is less of a free market than the latter, since there is an additional restriction on the choices economic agents are permitted to make. It also results in less choice, since the option of driving a cab is in practice not available to those who cannot raise the price of a permit.

On the other hand, this restriction keeps the price of a permit down; most of that benefit presumably accrues to the owner/drivers, but at least some of it must trickle down to the consumer.

Nightrunner said...

To David:

It is true that poor immigrant in NY has an option of acquiring multiple taxi licensees. It is also true that I am not precluded from flying to the outer space for a tune of $30 million or so. That kind of freedom is extremely useful, much more than the freedom of actually buying a license and driving a cab in Milan.

David Friedman said...

To Nightrunner:

Are you being deliberately obtuse?

Because the taxi company in NY has the option of obtaining multiple licenses, the poor immigrant in New York has the option of a job driving a cab whose license someone else is paying for. The poor immigrant in Milan does not have that option.

In both cities, the poor immigrant has the option of buying a license and driving a cab--and it is equally useless in both.

Nightrunner said...

To David:

"Are you being deliberately obtuse?"

I shall bear that with dignity :) An immigrant can be driving the cab in either city. However in Milan a large company cannot get a loan and bid up the cost of the licenses so high it is out of reach of the people who might be interested in providing a decent service. The result is that NY drivers are among the worst in any developed country.

David Friedman said...

A poor immigrant cannot, in practice, be driving the cab in Milan, because he cannot afford the cost of the license. A poor immigrant can in practice, and lots do, drive the cab in NY (or San Jose, where my recent observations are--but I don't know the details of the rules there).

It's possible that the Milan system results in better cab drivers--I don't have the data to say. But that wasn't the question I initially commented on, nor any part of the response of yours I objected to.

Nightrunner said...

David: Why cannot an immigrant drive a cab in Milan? Anyone can buy the license and hire an immigrant - or does the license require that the licensee drives the cab personally?

David Friedman said...


As I understand the system, the license does not require that the owner drive the cab himself, or at least not that he be the only driver--I was told that the owner sometimes shared the driving with his son, for instance. My guess is that what you describe is legally possible, but that the costs associated with a firm with only one employee, in contrast to a firm of optimal size, are large enough to make it uncommon. That's judging by the description I got talking to people in Milan.

limostarz said...

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Nightrunner said...

David: If it is a scale issue, several licensees can co-op, hire drivers and share admin costs, right?