Wednesday, June 3, 2015

Housing Tax Policy, A Series: Part 37 - Our perpetual indignation generator

Here's a recent front page story in the Seattle times.  You see, they are proud in Seattle for leading the charge on the $15 per hour minimum wage, because rents have gotten so high that someone working full time at minimum wage levels can't afford to live in most of the apartments in Seattle.

So, demand for apartments in our major cities is high.  In cities that happen to be in "blue" states, where there are more regulatory limits to building, rents have increased.  Demand was increasing and supply was bureaucratically limited.  This meant that new housing consumption was being claimed by higher income households.

(What else could really happen?  The five cities with the lowest rent in the Seattle Times story: Birmingham, Houston, Memphis, Oklahoma City, and Phoenix.  The five hughest: Honolulu, Los Angeles, New York, San Francisco, and Seattle.)

In those high rent cities, the reaction of the locals to these new high income tenants is to put limits on supply.  So rising demand causes rents to rise, which leads these cities to lower supply, which causes rents to rise more.  And, since low income households can't afford rent any more, these cities are starting to raise the minimum wage to unprecedented levels.

The uncontroversial first order effect of these higher minimum wage levels will be a lower quantity of labor demanded.  But, some believe that there will be a mitigating increase in labor demand due to the higher spending of minimum wage workers.  So, what will these workers spend their new higher wages on?  Well, according to those proud advocates in Seattle, they will spend it on rent.

So, now we have again raised demand for housing, which, in this perpetual choose-your-own-adventure saga, takes us back to the beginning of this post.

Meanwhile, real estate owners in blue cities, the beneficiaries of these policies, collect higher rents and capital gains, while a rising cost of living hits low income households the hardest because they spend the most on rent.  And because we haven't been able to force every landlord in every blue city to rent their units for $500 after the local planning commission has managed to make them worth $1,000, this must be the fault of deregulation.  And since there are still some banks willing to issue mortgages on the market value of houses that the planning commission has managed to push from $500,000 to $1,000,000, then this must especially be the fault of banking deregulation.  Thus, the story goes, deregulated markets lead to more income inequality.

And round and round we go in the circle game.


  1. And what are companies doing in Seattle to circumvent those higher minimum wages ?

    1. Willy2,

      Here's an old post where I tried to work through the process:

      I think the thought experiment in that post gets at why different studies find different outcomes, why the disemployment effects of MW hikes don't show up well if you're just tracking individual workers or firms, and why the only place the disemployment shows up is in aggregate data, where it is difficult to capture because so few jobs are directly affected. It's tricky enough that empirical findings will tend to track with theoretical priors, I think.