Can't Rent? Don't Blame the Minimum Wage

An eye-catching graphic from the National Low Income Housing Coalition has gone viral online, one that shows that a week’s worth of work at minimum wage isn’t enough to afford rent for a two-bedroom unit in any state.

A little background on the image: the Coalition, in its report Out of Reach, simply took the Department of Housing and Urban Development’s Fair Market Rent (the 40th percentile of gross rents for typical, non-substandard rental units) for each state, and found out how many hours a week one would have to work at each state’s minimum wage in order to afford that rent (defined as paying less than one-third of one's income as rent). In no state is it fewer than 40 hours, and, as shown in the chart above, in most starts it’s closer to 80 hours. Along the East Coast and in California, however, it’s well over 100 hours. There aren’t enough hours in a week to afford a two-bedroom unit in Hawaii.

What is the takeaway from this chart? HUD secretary Shaun Donovan, writing in the introduction to the Coalition’s report, identified one intuitive answer: we need to increase affordable housing. New York Times editorial page editor Andrew Rosenthal offered what is probably most people’s immediate response, namely, that a minimum wage increase, which Barack Obama promised as a candidate but hasn’t delivered, is the natural solution.

Both Donovan and Rosenthal’s proposals are noteworthy because, instead of addressing the problems suggested by the Coalition’s graph, they would repeat some of the key policy mistakes that have led to the current episode of joblessness.

Raising the minimum wage would do little to help those who are struggling to afford a two-bedroom rental. Roughly half of all income-wage earners are between the ages of 16 and 24. Those are not prime working years. Instead, teenagers and those in their early 20s are likely to be high school and college students who haven’t yet started their careers. Odds are, they also live with parents or others, and in the vast majority of cases would not be interested in renting a two-bedroom apartment.

Any raise in the minimum wage would disproportionately affect kids who aren’t even looking to rent two-bedroom houses or apartments.  A hike sufficient to boost minimum-wage earners’ incomes to the extent that they could easily afford such rents would also be large enough to price most young folks out of the labor market.

Increasing government affordable housing programs, as Donovan recommends, would be problematic in a few different ways. Setting aside the perennial questions about the role the governments’ various affordable housing programs played in inflating the housing bubble, there are limits to what affordable housing programs can accomplish. As the economists Ed Glaeser and Joseph Gyourko noted in their 2008 book Rethinking Federal Housing Policy, affordable housing projects such as public housing or tax credits often benefit developers as much or more than low-income renters. Another drawback is that such policies subsidize low-income renters to stay in areas where there simply aren’t jobs available, trapping them in unsustainable situations.

There’s no substitute for more and better-paying jobs. But there’s a better demand-side solution than a higher minimum wage or public housing. Glaeser and Gyourko recommend pure housing vouchers, which would bring rent within the reach of more lower-income folks, and avoid subsidies accruing to developers and eliminating renters’ choice of locations. 

The broadest, most lasting fix, though, would be to address the supply side of the housing equation that makes rents unaffordable in the first place. Take another look at the graphic: rent for a two-bedroom unit is much further from the grasp of a minimum-wage earner in coastal states than in flyover country. There are a number of reasons for the discrepancy, but there’s one in particular within governments’ control, namely land-use regulation.

Economists from Paul Krugman on the left to Thomas Sowell, in his recent book The Housing Boom and Bust, on the right, have argued that land use regulations in the Northeast and in California played a significant role in raising housing prices and expanding the housing bubble.  Building codes, zoning, environmental regulations, and other land-use restrictions made it so that increased demand for housing could not be met with increased supply, but only with increased prices. Housing can keep up with population growth in Atlanta because developers can simply build further out into the suburbs. In Boston, however, density and zoning make building out much harder, with the result that housing prices must rise. Over time, elevated housing prices result in higher rents, too.

In general, if developers in the coastal areas were allowed to build out (and up) more than they are today, prices would converge toward those in the parts of America where such stringent land-use restrictions don’t apply. The federal government has little say in determining state- and local-level land-use regulations, although it could use housing grant money to incentivize localities to adopt more construction-friendly regimes. Cities and states, however, have it in their power to significantly lower rents by far more than any minimum wage hike could increase incomes.

Perhaps that approach isn’t as satisfying in its aggressiveness or bluntness for those who worry about the unaffordability of rents today. But it would prove a far more sustainable solution to the real problem of sky-high rents.