According to researchers at Carnegie Mellon University analyzing Seattle’s law in a National Bureau of Economic Research study, the average base pay per delivery jumped from about $5.37 to $12.52, but tips fell so much that more than one-third of that gain disappeared, and monthly earnings for highly active drivers were virtually unchanged after the first month.
When the city raised the required base pay per delivery, platforms adjusted pricing and interfaces to offset the higher cost. Delivery fees went up, and customers tipped less and, in some cases, ordered less often.
The higher guaranteed pay per trip also attracted more drivers onto the platforms, which is a predictable response in any open-entry market. But when more workers compete for a limited number of orders, each driver gets fewer trips. Highly active drivers completed roughly 20% to 30% fewer deliveries per month, even as their pay per trip increased. Their total earnings flattened after an initial bump, and their utilization fell as idle time increased, with the share of active time spent actually delivering dropping by about 11% and wait times between orders rising by roughly five minutes. What looks like a wage increase is really just a reallocation of the same work.
Seattle’s experience reflects a broader pattern. California’s Assembly Bill 5 tried to address similar concerns by forcing many independent contractors into traditional employee classifications. It was sold as a way to provide more stability and benefits, but it made many forms of flexible work harder to sustain. Companies reduced opportunities, restructured operations or exited certain markets because the new rules made the economics less workable.
Pacific Research Institute economic Wayne Winegarden has documented the effects of these independent contractor regulations, finding that AB 5 virtually outlawed gig work for many Californians and reduced entrepreneurial opportunities, especially for low-income communities and communities of color. To attempt to reduce the damage, the Legislature exempted more than 100 job categories from AB 5’s rules — and voters exempted rideshare drivers.
These policies are now colliding with a separate effort at the federal level. The recent “no tax on tips” provision allows many workers, including app-based drivers, to deduct a capped amount of their tip income from federal taxes for a limited period, based on the idea that lowering taxes on tips lets workers keep more. Tips have long been a major part of earnings in service work and gig delivery, so the change should help. Because the state of Washington does not tax wage or tip income at the state level, any benefit for Seattle drivers comes entirely from the federal deduction, not from state conformity.
When policies push compensation away from tips and toward higher base pay, they reduce the share of income that qualifies for favorable tax treatment and increase the portion that is fully taxable. The result is that take-home pay remains flat or even declines, despite both local and federal efforts aimed at increasing it.
If the goal is to help workers earn more and keep more, the focus should be on preserving the conditions that allow income to grow: open access to work, room for platforms to adjust without heavy-handed mandates and tipping as a meaningful part of compensation.
It also means recognizing that tax policy and labor policy need to work together rather than at cross purposes. That is the core lesson for a Free Cities Center approach: cities that protect flexible, voluntary work arrangements and resist AB 5-style micromanagement will do more to improve gig workers’ prospects than cities that try to centrally plan their pay.
Seattle’s experience offers a clear warning. Changing the rules around pay can shift where income comes from, but they do not guarantee that workers will be better off. If the objective is to improve outcomes for gig workers, the path runs through flexibility, competition and aligned incentives, not through attempts to centrally plan how their pay is structured.
Anthony Velasquez, MBA, is Pacific Research Institute’s communications specialist.