Higher Wages and Housing Supply

Peter Coy of Bloomberg Businessweek touches on an important issue — the ways in which exclusionary zoning regulations make life harder for low-income Americans, and push them from high-productivity regions with severe housing supply constraints to lower-productivity regions with more affordable housing. But he doesn’t take the next step.

In a number of states, including California, there is a new political push to establish higher minimum wages. And though scholars like Jonathan Meer and Jeremy West have found that higher minimum wages tend to depress employment growth, other scholars have found that higher minimum wages increase low-end incomes. It remains to be seen if either set of claims will hold up, but let’s say that higher minimum wages to translate into higher low-end incomes. What happens if supply constraints in the housing market remain untouched, or if the housing supply actually shrinks? A recent report from Harvard’s Joint Center for Housing Studies from that the number of “cost-burdened renters” had greatly increased:

While the steady erosion of household incomes has helped lift the ranks of cost-burdened renters, the affordability problem fundamentally reflects the simple fact that the cost of providing decent housing exceeds what low-income renters can afford to pay. Consider the case of renters with $15,000 in annual income. To meet the 30-percent-of-income affordability standard, they would have to find housing that costs no more than $375 a month. By comparison, the 2011 median monthly cost for housing built within the previous four years was more than $1,000. Less than 34 percent of these new units rented for less than $800, and only 5 percent for less than $400.

Given this mismatch, it is no surprise that the gap between the number of lower-income renters and the supply of affordable units continues to grow. In 2011, 11.8 million renters with extremely low incomes (less than 30 percent of area median income, or about $19,000 nationally) competed for just 6.9 million rentals affordable at that income cutoff—a shortfall of 4.9 million units. The supply gap worsened sub stantially in 2001–11 as the number of extremely low-income renters climbed by 3.0 million while the number of afford able rentals was unchanged. Making matters worse, 2.6 million of these affordable rentals were occupied by higher-income households.

If higher minimum wages do substantially increase low-end incomes, we address an important aspect of the problem by increasing the rent that low-income households can comfortably afford to pay. Higher incomes might, in an unconstrained housing market, include new housing supply. The problem is limited by regulatory barriers, rent inflation will eat up some share of the income gains—possibly a very large share. The report offers some recommendations on supply:

To make progress on the nation’s legislative goal of affordable homes for all requires a multi-pronged approach. Part of the solution is to persist in efforts to reduce regulatory barriers to construction of rental housing in general, because expanding the supply helps to reduce rent inflation for all households. But efforts to develop low-cost rentals deserve particular attention. A growing number of jurisdictions have in fact put some form of requirements or incentives in place to include more affordable housing in larger developments. State and local governments are also under growing pressure to provide greater allowances for the construction of smaller units, higher-density developments, and rentals with fewer amenities. For example, building accessory dwelling units (ADUs) within established neighborhoods is a promising means of adding modest rentals in convenient locations. Development of very small apartments, or micro units, may also help increase the affordable supply in high-density, high-cost areas.

But one wonders if the recent emphasis on statutory wage floors makes much sense given that housing supply constraints in high-cost regions will be untouched by such measures, and might actually matter more when it comes to improving access to economic opportunity by allowing low-wage workers to remain in or to migrate to high-productivity regions. 


Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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