ECONLOG POST

Jun 4 2023

minimum wage, Minneapolis, price ceiling, price floor, rent control, rent stabilization

Econ 101 Lessons from Highway 61 Revisited

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Econ 101 Lessons from Highway 61 Revisited
Categories: Economic Education Government Growth Microeconomics Price Controls

By John Phelan, Jun 4 2023

A year ago, I wrote about twin examples offered by one of Minnesota’s Twin Cities, St. Paul, of the principles of Econ 101 in action.

The Saint Paul City Council passed a minimum wage ordinance in 2018 that, from January 2020, would raise the city’s minimum wage by stages to $15 an hour for all firms by 2028. Research found that:

… even just the anticipation of the minimum wage hike appears to have driven declines in jobs, hours, and overall earnings for restaurant workers in St. Paul, just as Econ 101 would predict.

A nice illustration of a price floor in action.

St. Paulites had also voted to enact one of the strictest rent control measures in the United States, capping annual rent increases at 3% with no allowance for inflation or exemption for newly built properties. And:

Data compiled by the U.S. Department of Housing and Urban Development shows that, since the measure was passed, the number of building permits issued in St. Paul is down over 80% compared to the same period during the previous year.

An equally nice illustration of a price ceiling in action.

But St. Paul’s Twin, Minneapolis, is also offering itself as an economic policy laboratory and it is also providing examples of price floors and ceilings at work with minimum wage hikes and rent controls.

The Federal Reserve Bank of Minneapolis recently released its latest reports on the consequences of the Twin Cities’ minimum wage hikes. For St. Paul, it found that, by 2021 Q4, the hike led to:

… an average decline in jobs of 2.2 percent, an average decline in total hours worked of 2.3 percent, and an average decline in wage earnings of 2.1 percent. The largest effects are found in the restaurant and the retail industries, in lower-paying establishments, and for lower-paid workers.

In the retail industry, the hike reduced jobs by 23%.

Across the Mississippi in Minneapolis, the study found that, by 2021 Q4, the minimum wage hike led to:

… an average decline in jobs of 1.7 percent, an average decline in hours worked of 1.3 percent, and an average decline in wage earnings of 1 percent. The largest effects are found in the restaurant and the retail industries, in lower-paying establishments, and for lower-paid workers.

In the retail industry specifically, the hike reduced jobs by 28%, hours worked by 20%, and earnings by 13%.

In both cases, hikes in the minimum wage, a price floor, made labor more expensive and employers responded by buying less of it, just as Econ 101 would suggest.

Minneapolitans also voted for rent control measures in November 2021, but the city has dragged its feet implementing it. A new report, commissioned by the city itself, indicates why. It found that:

A rent stabilization policy would not effectively address the problem of renter cost-burden. It does not target relief to renters whose incomes are insufficient to afford rent in the housing market. A rent stabilization policy would also impede growth of the city’s housing stock, which is counter to numerous existing City policies designed to promote the production of new housing to ensure existing and new residents have access to a range of options to meet their needs.

It warned that:

If a rent stabilization policy was adopted in Minneapolis:

  • Some existing renters could benefit from increased housing stability due to the certainty of the limit on future rent increases.
  • Renters may in fact face greater housing instability due to higher rent increases than they otherwise would have experienced, as property owners could begin raising rents to the maximum amount allowed.
  • Renters may experience diminished housing quality, as a rent stabilization policy could disincentivize property maintenance and improvements.
  • There could be a significant decline in the creation and preservation of rental housing units in Minneapolis.

Ultimately, “The costs and detrimental impacts of a rent stabilization policy would outweigh any potential benefits in addressing renter cost-burden.”

All of this is as you’d expect from Econ 101. A price ceiling increases demand and reduces supply exacerbating the very shortages it is often intended to fix.

Minnesota is setting itself up as an experiment in expanded government: “Minnesota Democrats plan to grow state government to historic size,” the Pioneer Press reported recently. Its government is proposing to hike spending and, even with a forecast budget surplus of $18 billion dollars, raise taxes too. NBC News recently labelled the state “a laboratory for how to effectively use that power to achieve progressive policy priorities.” Nowhere is that truer than in the Twin Cities of Minneapolis and St. Paul. The results speak for themselves.

 

RELATED CONTENT By Robert P. Murphy
Large Increases in the Minimum Wage Are Likely to Destroy Jobs
"Dube et al. are merely placing a ceiling on how bad the employment drop will likely be." U.S. government officials at all levels are either discussing or have already implemented increases in the minimum wage. It is unsurprising that union leaders generally support such measures, but at this point, more than 600 economists—including seven Nobel laureates—have signed an open letter urging federal officials to raise the minimum wage to $10.10.1 Such a move would involve a 39-percent in...
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READER COMMENTS

Richard Fulmer
Jun 4 2023 at 7:38pm

My first reaction to this post was frustration. The ill effects of minimum wage hikes and rent controls have been demonstrated again and again. Are people incapable of learning?

But then I realized that those imposing the price controls have learned the lessons very well. Politicians want, above all, to get re-elected, so they pander to the greatest number of voters. There are far more wage earners than wage payers and far more renters than landlords.

A key problem with central planning is that the planners’ incentives don’t necessarily align with the interests of those whom the planning is ostensibly meant to serve. All too often, central planning serves only the central planners.

MarkW
Jun 5 2023 at 1:08pm

There are far more wage earners than wage payers and far more renters than landlords.

Yes, but that isn’t even the problem.  Minimum wage increases are bad for low-wage earners and rent-control is bad for renters — except for a minority and in the short term.  But the worst effects are not immediate and the mechanisms are not obvious, so it’s hard to see what’s going on with the naked eye (particularly when people are naturally predisposed not to believe).

Michael Stack
Jun 6 2023 at 8:41am

My mental model is that politicians are evaluated on both the policies they pursue, as well as the results they achieve.

When voters want destructive policies it puts politicians in a real bind. For most politicians, the answer is simple – pay lip service to destructive policies, but don’t actually implement them.

Thomas Hutcheson
Jun 5 2023 at 8:39am

Great analysis.

The same Econ 101 principles should be applied to net emissions of CO2.

Jon Murphy
Jun 5 2023 at 11:29am

It’s not?

Knut P. Heen
Jun 9 2023 at 11:13am

Supply and demand perhaps, but not the law of one price. CO2-taxes varies from country from zero to far too high. Add in subsidies and regulations and you realize that almost every molecule emitted has a different price.

nobody.really
Jun 6 2023 at 3:56pm

Quibbles about language usage:

If a rent stabilization policy was adopted in Minneapolis….

This accurately quotes the language of the document–a document that switches between recognizing and rejecting use of the subjunctive tense. Conventional usage would say “If a rent stabilization policy WERE adopted in Minneapolis….”

All of this is as you’d expect from Econ 101. A price ceiling increases demand and reduces supply….

In Econ 101 I learned to say that a price cap would tend to increase the quantity demanded, and to use the term “increase demand” to refer only to a shift in the demand curve.

Econ 101 Lessons from Highway 61 Revisited

Cute reference to a Bob Dylan album–yet Highway 61 is 150 miles from the Twin Cities. Maybe we could find a Prince reference? (“The city council said, ‘Let’s Go Crazy'”? “We’re Gonna Party Like it’s 1984”?)

Comments are closed.

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