How NYC’s Yellow Cab Works and Makes Money

<div>How NYC's Yellow Cab Works and Makes Money</div>
Reviewed by Somer Anderson
Fact checked by Vikki Velasquez

<div>How NYC's Yellow Cab Works and Makes Money</div>

 

Tetra Images / Getty Images 

The streets of New York City are known for its famous yellow cabs. These ubiquitous vehicles are constantly patrolling looking for those who need a ride. To the casual observer, owning and driving a cab in a big city like New York can mean big bucks. Leasing, fares, and tips are among the most common ways that cab owners and drivers make money. But there’s a lot more than meets the eye when it comes to earning a living with a cab in the Big Apple.

Key Takeaways

  • Cab owners make money by leasing their cabs.
  • Drivers earn money from fares and tips.
  • New York City cabs require a medallion to operate on the road.
  • The city’s taxi cab industry has been hit by ride-sharing apps like Uber and Lyft.

Making Money with Cabs in NY

Making money with a cab (in New York City) depends on different factors, including who owns the vehicle and how their business is set up among others. But for the most part, it’s usually a cab company that owns the vehicle. They lease it to their drivers who get to keep 100% of the fares and tips. 

But how does a driver get access to a cab? Suppose a driver goes through the appropriate background check and can get a cab driver’s license. They then go to the cab company as an independent contractor and lease a vehicle for about $150 per shift, which can last between 10 and 12 hours. This lease amount varies depending on the day of the week and whether or not it is a daytime or an overnight shift. 

During the driver’s shift, they collect 100% of the fares and tips. The difference between what they bring in and the lease amount is how much they make in wages, which typically amounts to about $25,000 to $40,000 per year. Since drivers are considered independent contractors, all expenses are their responsibility.

The Cab Company Wins

If a cab company leases a vehicle every day of the year, it can bring in around $80,000 per year. That’s a substantial sum for one vehicle, but that doesn’t include taxes, insurance, maintenance, and the fact that the vehicles must be replaced every three years. Even so, if that diminishes the returns by $25,000 per year, the vehicle still earns $55,000 each year.

Let’s say the cab company buys a medallion for $1 million (more on medallions below), they now make $55,000 per year off that medallion. That’s a 5.5% real return on their investment. Compare that to a Treasury bond. As of November 2024, interest rates for a 30-year bond, are right around 4.5%. This means that the owners of these vehicles and medallions are getting 1.0% more with little additional risk.

Important

Taxi fares are set by the city’s Taxi and Limousine Commission, along with the amount at which a cab owner can lease the vehicle to the driver.

Understanding Medallions

The NYC cab medallion is attached to the hood of the car. This piece of metal signifies that the taxi can legally operate in New York. The number associated is also displayed on the cab’s overhead sign and the licensing paperwork.

The Going Rate for a Medallion

There are more than 13,500 medallion cabs in NYC. This number is closely regulated by the city government, and most new cabs are the result of a medallion being bought and sold on the private market. That is to say, the city rarely creates new ones. This regulation helps to keep the supply of cabs down, and the cab companies in business. More on regulation below.

Like any other commodity, medallions fluctuate in price almost daily. So to put a price on them is just saying, “This is how much they were recently sold for.” As of November 2019, medallions were running about $164,000. And they had to be bought in pairs.

Why Do Medallions Cost So Much?

If you want to get into the cab industry in NYC, you have to pony up around a million dollars just for the right to operate the vehicle. That doesn’t include any of your operational costs. So why would anyone buy a medallion? It seems like a waste of money on the surface. If we dig down, we can see there are some very good reasons.

The primary reason that the medallions cost a lot is simply the scarcity of them. People want them, they are hard to come by, and people are willing to pay that much for them. Just like a rare piece of artwork, a precious jewel, or an ounce of gold, what people are willing to pay dictates the majority of the price. But there is an additional underlying reason: low interest rates.

If we look at the value of a medallion in 2004, we can see they were selling for just under $400,000. When the economy went south in 2007, the price of a medallion bucked the trend and started increasing rapidly. By 2010, the value of one doubled. By 2014, the value tripled from the 2005 price. The biggest reason: dropping interest rates.

People in the taxi business consider the price of a medallion as an investment rather than a cost. It’s a very safe investment (as long as you’re a good business owner) with pretty low risk. To get that same low risk, you would have to invest in a Treasury bond. Remember, this investment brings a return of 4.5% as of November 2024.

The History of the NYC Cab

New York City’s taxi industry is an interesting coordination of supply and demand that is overseen by government regulations. But, many people who sit in the back of those yellow cabs may not necessarily know the history of the industry, which dates back to the beginning of the 21st century.

During the Great Depression, thousands of working men were laid off every day. With basically nowhere else to turn, many of those men became NYC taxi cab drivers. Almost overnight the number of cabs on the road exploded, and suddenly supply was far greater than the demand.

The cab industry was destined for destruction, so the government stepped in to regulate it. In 1937, New York City created the taxi cab medallion system.

Note

The first gas-powered cabs began driving through New York City streets in 1907.

How the Government Regulates Cabs in NYC

But that’s not all the government does to keep the taxi industry in check. The Taxi and Limousine Commission also has a hand in overseeing the industry by (this isn’t an exhaustive list):

  • Regulating how much a cab can charge per mile or minute
  • Determining a cab company’s leasing fees for drivers
  • Monitoring driver routes (to ensure they are not artificially inflating the price 

In essence, a cab company (or a cab driver) can only make as much money as the government allows them to make. But it takes money to make money when you own a cab in New York City.

Challenges for Cabs in NYC

Cab owners and drivers face a series of challenges that are putting a dent in their bottom line—notably ride-sharing.

Services like Uber and Lyft have shaken up the industry because of their ease of use. Rather than having to hail a cab, commuters can schedule a ride to pick them up through an app. Data shows that New Yorkers took more than 617,000 ridesharing trips in August 2024 compared to roughly 95,000 cab rides.

This drop in ridership means that cab drivers are feeling the pinch at the most basic level, too. The value of taxi medallions dropped significantly—in 2014, those medallions were running about $1 million each, and four years later, they dropped to $160,000.

But, that’s not all. Temporary situational problems can lead to a drop in ridership. For instance, the industry experienced a 91% drop during the COVID-19 pandemic.

How Much Does It Cost to Take a Cab in NYC?

The base fare for a New York City cab is $3. Fares increase by 70 cents for every additional 320 meters traveled. Expect to pay an additional $1 if you’re traveling between 8 p.m. and 6 a.m. Drivers also charge an additional $1 during rush hour, which falls between 4 p.m. to 8 p.m.

What is Ride-Sharing?

Ride-sharing is a business where commuters can hire drivers of private cars as a means of transportation—typically through apps. Uber and Lyft are two of the dominant forces in the ride-sharing industry.

How Many Taxi Drivers Work in New York City?

According to New York City’s Taxi & Limousine Commission, there were 13,587 licensed taxi cabs in the city. There were more than 173,000 drivers licensed to operate taxis and for-hire vehicles in the city in 2022.

The Bottom Line

The past decade has been great for people who own medallions (they have seen exponential growth in the medallion value all while their income stream has remained stable). But, with ride-sharing apps shaking up the industry and chipping away at market share, the future may not be so kind to the yellow cabs of New York City.

admin