Thursday, July 28, 2016

Housing: Part 168 - Minimum Wage and Closed Access

Adam Ozimek outlines some early research about the minimum wage hike in Seattle.  There is some evidence of unemployment and of workers shifting to other nearby jurisdictions in order to work.

Normally, I take a position against minimum wages, in general.  But, Closed Access housing sort of tweaks normal economic intuitions, so sometimes, I wonder if the implications are a bit different there.  And, it is generally the Closed Access cities who are imposing high minimum wages.  Unfortunately, New York and California are imposing higher minimum wages even in their inland cities and rural areas, many of which have very low wage levels or long term issues of economic stagnation.  Those areas will probably be especially hurt by the wage floor.

But, what about the Closed Access cities?  Access to our most productive labor markets is sort of the critical path for economic growth now.  Economic growth and economic dislocation are inseparable as long as our cities are incapable of increasing residential density.  In the 2000s, economic growth led to dislocation, and millions of low income households were passively relocated through economic stress.

Monetary and credit asphyxiation have cut down on migration related to economic growth so that, now, low income households get to suffer under rising rents wherever they are.

But, if high minimum wages in the Closed Access cities are able to create a subclass of haves and have nots, where many low wage workers get a little boost that helps them make rent, and a small portion of low wage workers get a pink slip, maybe this will lead to economic growth by reversing the causation.  Maybe those unemployed workers will migrate away from the Closed Access cities to move to a city that is willing to let them work, leaving a housing unit behind to be filled by an aspirational, high skilled worker.

In the 2000s, demand for housing from aspirational workers caused rents to rise, but in this minimum wage case, it is a decline in demand for housing from out-migrating workers that would lead to the migration cycle, so rents should remain moderate, and the strangled mortgage market will keep home prices down.  Since that will make the cost of moving into the Closed Access city lower, there will be less pressure to increase the already high incomes of the highly skilled workers moving in.  That means that less of our economic growth will be flowing as economic rents to Closed Access landlords, workers, and firms.

Closed Access cities create a slow-motion segregation by income in a country.  That is a powerful governor on economic growth.  What if we jacked this into high gear.  Maybe the Closed Access cities should raise their minimum wages to $25 or $30 per hour.  It would be terrible for the low income households that still live there, but it would really only speed the inevitable outcome that is doomed to meet them anyway.  They might as well start their new life in Phoenix or Atlanta now, rather than 10 or 20 years from now.  This is cruel, but it's a necessary evil in a Closed Access economy.  And, in the meantime, the Closed Access cities will fill up with workers that can really leverage the benefits of a highly networked, highly skilled pool of creative workers.

Might this have a positive effect on the national economy?  The rest of us will enjoy the multiplied fruits of the labor of new workers in telecommunications, biotech, and finance.  And, we will retain more of the consumer surplus instead of sending it to Closed Access landlords via the firms that are protected from competition by locating where labor access is constrained.


  1. Interesting thesis. Will it just lead to some complicated regulatory arbs where companies convert everyone to independent salaried contractors? Let's play this out further... at $25 an hour, what jobs do companies not seek to automate? If low productivity jobs are automated away in closed access cities, does the barrier for broader adoption outside of closed access regions become lower, further accelerating the trend towards loss of basic entry level jobs to the workforce?

    In the short term, I'd think companies would respond by raising prices in closed access cities, upping the cost of living there and somewhat reducing the migratory incentive to those locations to begin with. Sucks for the people who are priced out of an area they've historically lived in, but just indicates that those workers will be more productively employed elsewhere (also helps reduce housing market pressure in closed access regions). I'd suggest coupling it with a program to retrain those who get laid off in trades the economy is currently short of (e.g. welders) and relocation assistance. I volunteer Portland to try the experiment and report back in a few years so I can continue to harvest the relatively high spread in Seattle between pay and cost of living (which is eroding as we speak due to continued housing market pressure).

    1. Interesting.

      Thinking about your comment, I may be wrong about the distributive effects and the effects on home prices. Any wage gains taken by workers will be funneled into nominal housing expenditures.

    2. The jury is out for the long run, but it appears Seattle is prospering with its minimum wage rise. So, as far as jobs and the economy, the minimum wage is good. Too soon to tell if it will force rents up.

      Kevin, you may be interested in the article at my name. It looks like bond hoarding and the decline in yields, in good and bad times, began with Greenspan and structured finance back in the 1980's. So, forcing the long bond rates up under such growing, and now massive demand, by monetary policy seems to be futile. I told Scott Sumner that the reason NGDP is ignored is that demand for bonds is where the Fed wants it. He never answered me, even though I was the only one who answered his question why NGDP is no longer talked about at the Fed. So, massive demand for bonds under Greenspan, a little boost through QE in the Great Recession and now even more massive demand for bonds as collateral in the present day.

    3. And by prospering, you mean:

      * The rent's up 12%
      * Wages are up 2.1% compared to 2.9% nationally.

      Hence Closed Access.

    4. Kevin, I've seen your posts at some other sites, and I have to say, you really get what I've been writing about.

    5. Gary, the link might be broken, but I'm just not that interested in the bond story. There are countless sources of demand, countless substitutions for various securities - including cash. And prices and rates moving in response to all of it. I just don't see much value in thinking about it.

    6. Hi Kevin, efforts to pump too much inflation will be ignored by the Fed. So I think NGDP targeting will be ignored by the Fed because these bonds will lose value and undermine the banks. JMO. Anyway, here is the link, at my name again. I really wish you would look into the history of structured finance, if only briefly.

  2. Congratulations on recognizing that the effect of the minimum wage in a particular location is an empirical issue rather than a theoretical issue. That distinction seems to have escaped most economists and all politicians.

    You say: "if high minimum wages in the Closed Access cities are able to create a subclass of haves and have-nots, where many low wage workers get a little boost that helps them make rent, and a small portion of low wage workers get a pink slip, maybe this will lead to economic growth by reversing the causation. Maybe those unemployed workers will migrate away from the Closed Access cities to move to a city that is willing to let them work, leaving a housing unit behind to be filled by an aspirational, high skilled worker."

    The subclass you're describing already exists for reasons including those you've covered for a long time - inelastic housing supply at the lower-end of the rental market and rent controls. The pink slip effect at the lower-end of the employment market from a high minimum wage isn't going to reverse the growth or migration trends related to the Closed Access cities, rather it will accelerate them.

    Low productivity and low paid workers in Closed Access cities can already move to Open Access cities. There is nothing about a $15 minimum that suggests a new outmigration from a city like San Francisco to one like Dallas.

    Rather, the migration will be workers from low productivity regions that cannot possibly support a $15 minimum to places like San Francisco or Dallas. These regions are the areas with chronically high unemployment, under-employment, and dependence on government transfers right now; regions that will be priced out of business by a wage structure they can't support. Think Puerto Rico or Detroit writ large.

    The problem of haves and have-nots (or, more accurately, insiders and outsiders) in the Closed Access cities will intensify, leading to demands in those cities for even more rent control, mandatory affordable housing construction, inclusionary zoning, higher taxes on the higher incomes, and so on, just like in San Francisco or New York City today.

    1. Harry, more restaurant workers are employed now than before the minimum wage was raised in Seattle. At least for now, it appears that it helps the general prosperity.

    2. @Gary, available evidence suggests Seattle's economy is booming despite the minimum wage increase, not because of it.

      The notion that minimum wage increase increases prosperity is, imo, another case of people speculating that owning a Ferrari makes people rich, when in fact it's that only rich people (or in this case rich cities) can afford to have Ferraris (or high minimum wages).

    3. So, Mark Z, your argument is that getting money into the hands of people who need more money does not increase prosperity? Give me a Ferrari, I will sell it, and I will be more wealthy than I am now. I am not sure you are thinking about what you are saying. Give people wealth and they will have more wealth. That is hard to argue against, Mark. :) Maybe you could reword that.

    4. Gary, this is the problem. Sometimes, I think you actually find something interesting to think about, but you end up peppering it with these elementary errors of logic, so you inevitably end up wrong about things, and for someone to address your arguments, they have to slog through your logic and find the place where you think giving things to each other creates wealth. This is basic stuff. You have to develop a discipline for avoiding this.

    5. Ah, Kevin, your wisdom is duly noted. However, the big corporations are simply sitting on cash, since they don't trust banks anymore. They are sitting on cash that could flow into the real economy. I may spend some of that money I gain from selling the Ferrari. Apple or whoever owns Ferrari won't spend their hoard. You and Mark are saying that the turnover of dollars, which comes by putting money into the hands of those who will spend it, is of no use. I think that is wrong. JMO.

      By the way, since I have your ear, please tell Scott Sumner to check with Gary Gorton and David Beckworth, so that he will see that bonds are in massive demand and have been since the beginning of structured finance, QE or no QE. His system is based on the concept that you can create a lot of inflation when growth is slow. But the Fed cannot let all these bonds decline in value. It would require banks to buy more to replace the loss in value. And it would require clearinghouses to issue margin calls to counterparties. Greenspan was instrumental in this system of structured finance. Now he and his investors think that they can scare people to get rid of their bonds, so that they can go in and buy them.

      Just tell Scott he can ignore me to the end of time, but it won't make his silence on the issue of massive and increasing bond demand any more intelligent. Thanks.

      I appreciate your responses to my good or bad ideas. I have never claimed to be an economist, but not all economists can escape their own systems to think about other factors.

  3. Actually, the effects are both a theoretical and an empirical issue, but in policy it's rather moot, since both theory and empirical research suggest minimum wage is counter-productive.

    First, I think a point to be made here is that, if a situation can be contrived that a minimum wage increase actually causes less harm than good, then the labor market is already seriously distorted and over-regulated, and it's these issues that should be addressed rather than imposing artificial wage floors. If raising minimum wage in San Francisco enables SF policymakers to keep ignoring the issues with their housing policies, then it is absolutely counterproductive. I don't think these cities should be given an excuse for refusing to liberalize housing policies so that low wage workers can actually afford to live their, which would be optimal for everyone.

    Secondly, I'm not sure I would agree with Kevin's assessment that a higher minimum wage would really accelerate the replacement of unskilled residents with skilled ones. It seems like he's suggesting outlawing something that's already economically unfeasible. To the extent that being an unskilled worker is still possible while living in SF, raising the min wage will still cause price increases, making everyone slightly worse off, and pushing another layer of people closer to the brink of not being able to afford to live there. In short, after raising the min wage to $25 an hr, I surmise that people making $25-30 an hour will simply replace the people the people currently making $15-25 an hour as the class of workers who can barely afford to live there. Nor do I expect the newly disemployed workers will flee the city fast enough to drive down housing prices to compensate for price increases because labor isn't nearly as mobile as capital. Many, maybe most of those newly disemployed workers won't move to Houston or Atlanta, or will drag their feet in doing so (after all, there's a reason they live in San Francisco: because they probably actually want to live in San Francisco). Rather, you'll just get more and more people going on unemployment and and seeking public housing, or demanding massive public works projects to put them back to work.

    1. I was actually trying to reply to Harry's post, not sure what happened.

    2. Interesting comments.

      Harry, if I understand what you are saying, you are suggesting that the dislocation in the poor inland cities will be strong enough to drive some low skilled workers back into the Closed Access MSAs. Interesting idea. I suppose there could be some of that. I would expect, though, that disemployment among low end workers will tend to push the net migration outward. I would think they would tend to move out to Las Vegas or Phoenix, where costs are lower and employment more likely.

      Mark, great comments. You're probably right that my initial thought about housing might have been overstated. I think the pressure on migration is probable, though. This would be an economic dislocation aimed at households who are already most likely to migrate away. But, given that the gains to low income workers who keep their jobs will go to rent inflation, you are probably right that pressure will remain on home prices, and the general economic stress on the margin will remain the same. But, I think the targeted disemployment, especially in conjunction with rising costs, might trigger more migration.

    3. Kevin:

      What I'm saying is that there is no reason to expect medium-wage, medium productivity cities like Las Vegas or Phoenix to benefit from an influx of low productivity inland workers induced to move by the $15 minimum. Unless for some reason there is a shortage of low productivity workers in places like Las Vegas and Phoenix because employers are colluding to not pay them market rates, pushing up the rates to above market-clearing levels isn't going to help the cities or, in the long-term, the workers.

      Pushing up the wage rates for minimum wage workers to well above market-clearing levels (something around 50% of the local median) is going to hurt the regions and the workers overall in the short-term and the long-term. If the opposite were true, the biggest beneficiaries of a $15 minimum would be the very poorest regions of the country. Absent massive and permanent Federal transfers, these regions will be devastated by a $15 minimum. Strip away massive and permanent Federal transfers and the $15 minimum does to Puerto Rico, Appalachia, the Mississippi Delta, decaying inner cities, etc. exactly what a fixed exchange rate does for Greece in a non-transfer-union Eurozone. Exactly the same.

      I can see some low productivity workers benefiting somewhat, especially at first, from moving to these mid-range Open Access cities, which is what the progressive claim (without the caveat "at least initially") but that's about the end of the line for the progressives' claims. A big increase in the minimum wage isn't going to create new jobs so much as change the distribution of workers in the existing jobs.

      The big beneficiaries of a $15 minimum in medium or higher cities will be people who don't need the income, e.g., middle class college kids and stay-at-home college-educated moms and dads. These groups will be induced to enter the workforce by the high wage to the detriment of the progressives' intended beneficiaries, e.g., disadvantaged minorities, ex-felons, people without degrees, non-native speakers, etc. This dynamic is more likely to play out in the higher-end regions and Closed Access cities since this is where these favored demographic groups are more likely to be.

      The really big beneficiaries of high minimum wages in the Closed Access cities are not the low productivity, low wage workers induced to move there nor the middle class kids or stay-at-home parents. The really big beneficiaries are the owners of a highly inelastic supply of affordable housing. This is an issue you've covered in detail but not so much in the context of the minimum wage increase. High wage, high productivity cities like SF, SJ, NYC, and Seattle can certainly (at least initially) afford the higher minimums. What they can't easily do is explain what happens when the minimum wage pushes the lower-end of the demand curve for housing to the right and the supply curve for lower-end housing is vertical.

      What's going on in downtown SF right now is barely a preview of what will happen in every Closed Access city when the bottom end of the wage structure and the rising number of hopeful wage earners (many migrating from poorer inland areas) meets the vertical supply curve for affordable housing. The ironic aspect of this is that as this invariably becomes one of the biggest flash points in upper-end urban America, the frustrated renters (especially the existing renters) will blame the people who generally opposed the national minimum wage in the first place.

    4. I generally agree with what you say, here, Harry.

      My point about economic growth is that I think the core feature of early 21st century economic stagnation has been the fact that the new extremely high value of closely networked creative pools of skilled labor has run up against the failure of developed Western cities to be able to allow residential density. So, economic growth and innovation are limited by the number of highly skilled workers that can get into these cities. I was being a bit cheeky, I suppose, by suggesting that the dislocations MW policies impose on low skilled workers might at least make some room for high skilled workers in the cities that are imposing them, which might help us all by increasing the limit on the economy's "critical path" for creative disruption, which is getting skilled workers into places like San Francisco.
      The way to do that properly would be to build homes there. But, if San Francisco is dead set on kicking all the unskilled workers out of town, slowly over time, which they have already done to a large extent, then creating economic stress that inflates that process could be a perverse part of progress of the type we have to accept, given the hold that Closed Access policies have on us.
      I agree with what Mark said above. If the subtext that justifies MW hikes is true, it is the subtext that should be fixed, not the wage level. And, the subtext in Closed Access cities is mainly a lack of housing, which means higher wages will mostly bid up housing.
      I don't think Phoenix or Las Vegas would benefit or not. There would just be new people there. They would change. They aren't Closed Access cities, so that change isn't that big of a deal one way or another.

    5. The labor economics in SF are really interesting/terrifying right now.

      You're right that
      1. the minimum wage debate is a sideshow in SF, because low-prereq jobs already pay $12+ per hour.
      2. The housing shortage drives everything, including the labor inflation.

      However, I don't think your conclusion that "higher [minimum] wages will mostly bid up housing" is true in SF. The gains go to owner-occupiers and rent controlled tenants

      In SF proper, only about 10% of households live in market-rate rentals. ~50% of units are rent controlled, ~35% owner-occupied, and ~5% are subsidized public housing.

      In the Bay Area as a whole, 60% of units are owner-occupied and the biggest cities (SJ, SF, Oakland, Berkeley, Hayward) have rent control.

      That means that many current residents are somewhat insulated from rising housing costs. They're benefitting from rising wages + stable housing costs. For people who got in early, the only cost is that they can never move. Young adults can't move out of their parents' house, seniors can't downsize, and there is no exit from a neighborhood when all the stores and restaurants get too expensive.

      That brings us to stores and restaurants: they can't hire. The cafe on my block is only open four nights a week because they can't find workers. The opportunity then, is to automate the service sector. Several new automats opened downtown recently: the robot-burger place and the robot-salad place. There's also a robot-pizza delivery service in mountain view.

      San Francisco is moving toward a high-productivity future, caused by rising labor share of income. Too bad only ~7 million people will ever be allowed to board the ship :(

    6. Really interesting. Thanks for the input.

  4. Mark:

    I may be overstating this but I think the standard theoretical rejection of the minimum wage having any positive effect is incorrect. This theory (like most micro theories) is based on perfect competition, complete markets, symmetric knowledge, frictionless transaction costs, etc. The standard objection by libertarians focuses on market power or, more specifically, the absence of market power in large, diversified markets like any of the cities we're talking about.

    I think a better claim to a beneficial effect focuses on asymmetric information and labor market frictions. For the same reason many (but not all) retail products markets benefit from fixed, posted prices many labor markets would benefit from fixed, posted wages. In both cases, search costs are high (though much lower now with the internet) and information asymmetries are large. I think it is true that some minimum posted wage rate would permit the market to function more smoothly than no posted wage rate.

    Do I think it's $15 nationally? No, not even close. I don't even think it should be national at all but I do think it should be something, preferably in relation to the local median and preferably with some sub-minimum for younger or entry-level workers. I recognize the libertarian objection to this but my guess is that at some level it's welfare-enhancing. Probably something around 40% of the area median is a reasonable guess for the starting point.

    Now, that said, I totally favor Edmund Phelps' Making Work Pay wage subsidy idea over any relevant minimum wage and over the EITC as well.

    1. Harry, you might find the links under "minimum wages" in the post interesting. In those, I was trying to think through the implications of realistic competition, where individual firms have different amounts of monopolistic power, but the industry as a whole is competitive. I think this is why different researchers find different things, and why the costs of minimum wage hikes tend to only show up diffusely in aggregate long term measures and not so much through specific measures of individual firms and workers.

  5. Great post and comments.

    As usual, I will post my two cents that we should decriminalize push-cart vending, an unzone land not only for residential but for retail.

    There are legitimate concerns about being a first-world nation with a long border on a third-world badly governed nation.

    It is difficult to support a minimum wage.

    But with zoning and criminalizing push-cart vending and wide-open borders, we have tilted the playing field against the working class.

    There is a reason for Trump...