Rent Control and Minimum Wage When equilibrium gets disturbed.
Describe how government wage and price controls, such as rent controls and minimum wage laws, create shortages and surpluses. (k)
Rent Contrl • There are some cases when prices are NOT allowed to freely fluctuate according to market forces, but are fixed above or below the market price with a government mandated PRICE CONTROL. When the price is fixed BELOW the market price, it is called a PRICE CEILING.
Rent Control Continued • The most common example of a price ceiling is RENT CONTROL, which is in effect in over 200 cities in U.S., and in many cities around the world. Price Ceiling sets a MAXIMUM PRICE that can be charged by law. Prices above the maximum price ceiling are illegal.
An Example • But think of the change in incentives that will now cause a "housing shortage" in cities with rent control. At $900/month, tenants will have an incentive to conserve on housing space, live with several roommates, live at home as long as possible, etc. At an artificially low price of $500, now tenants would rather live by themselves, or move from their parents home into an apartment.
An Example Continued • In other words, at $500 the Qd increases. At $900/month, landlords will have incentive to provide more housing than at $500. If a building owner can only get $500/month, they will have little incentive to provide housing, and there will be very little incentive to build more housing. In other words, the Qs decreases significantly at $500. Therefore, the Q of apartments demanded by tenants will be much greater than the Q of apartments supplied by landlords, resulting in a "housing shortage."
Results of Rent Controls • Housing shortages will develop (Qd > Qs) and black markets will result. Example: Rent is $500 month, but the tenant pays a $2000 "key charge" as a way around the price control.
Results of Rent Controls continued • The future supply of housing will decline, since there is no incentive to build rental housing AT market prices if the rental income will be BELOW market prices.
Results of Rent Controls continued • The quality of rental housing will deteriorate. A seller can effectively raise prices by either a) raising the monetary price or b) reducing quality (or size). Example: Mars candy - raise price or reduce size (or quality) of candy bars. Landlords will respond to rent controls by reducing quality of rental housing, fewer repairs, less remodeling/painting, etc.
Results of Rent Controls continued • Long term renters with rent-controlled apartments benefit at the expense of newcomers. If we move to NYC today, we may not be able to find housing because all affordable housing is already taken by the existing tenants. Example: Former NYC mayor Ed Koch lived for 12 years in Gracie Mansion, the official mayor's residence, but kept his $440/month rent controlled apartment.
Minimum wage • A price floor sets a MINIMUM PRICE, making it illegal to pay or receive a price (wage) below the Price Floor. The Minimum Wage is the most common example of a legally enforced price floor.
An Example • The market clearing wage for unskilled workers is $4/hour resulting in Qd = Qs, Un Rate = 0%. If the legal minimum wage is set at $5.15, two things happen: Qs goes up since more people will be willing to work at $5.15 than $4. Qd goes down since employers will be willing to hire fewer workers at $5.15 than $4. Result: Qs > Qd. Minimum wage law = unemployment.
An Example Continued • How would employers respond to higher minimum wages? Lay off workers, hire fewer workers in future. Other possible adjustments to offset higher wages: Cut hours, have employees work at less convenient times (split shift from 11 am- 1pm and 4pm-7pm instead of 11-7pm), reduce benefits like paid holidays and free uniforms, reduce on-the-job training, etc. In other words, the NON-WAGE factors of a job will be reduced.
An Example Continued • Another effect: Increase in discrimination. For every job opening there might be dozens of applicants, making it much easier (less costly) to discriminate against minorities, unconventional lifestyles, etc. Economist Milton Friedman has called the Minimum Wage law "the most anti-black law on the books," because of its disproportionate negative effect on blacks, especially black teenagers. Teens are the group most affected by the Min Wage, and teen unemployment is generally 3x the national average, and the unemployment for black teens has been close to 30% recently.