RENT CONTROL
AND MINIMUM
WAGE
When equilibrium gets
disturbed.
WHAT DO THE FOLLOWING TERMS MEAN TO
YOU?
RENT CONTROL
MINIMUM WAGE
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 antiblack 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.