Bad Economics: Apartment Edition
Where can you rent a two-bedroom apartment on minimum wage?
Every few months or so, I see this map on Reddit:
Generally it pops up on far-left subreddits, such as r/latestagecapitalism or r/antiwork. Most recently it appeared on r/funnyandsad, which is generally sad and not very funny. As of this writing, the post has 27,800 upvotes and 1,600 comments. Fortunately, the comments are mostly sensible, with people stating that minimum wage has never been enough to afford a two-bedroom apartment. On the more lefty subreddits, the comments usually complain that a billionaire can have 50 homes while millions of minimum wage employees can’t afford a two-bedroom unit for themselves and their families.
This latter type of thinking is bad economics for a whole host of reasons. From a policy perspective, it makes no sense to say it’s wrong that a minimum wage earner can’t afford a two-bedroom apartment. Minimum wage earners aren’t supposed to be able to afford two-bedroom apartments. Someone could make a similar map where “every state marked in red is where minimum wage earners can afford a boat.” It’s an accurate statement but betrays a lack of knowledge of what the minimum wage is supposed to accomplish. One could also quibble with how this calculation was made. Is this the federal minimum wage or statewide? Is this being compared to the average two-bedroom apartment or the median two-bedroom apartment (see my post on the differences here). Also, what does “afford” even mean?
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This is all low-hanging fruit, and there are limits to dunking on those with not-well-thought-out opinions on the internet. Arguing about whether minimum wage workers should be able to afford a two-bedroom apartment is pointless; one could only come to that conclusion with a massively distorted view of reality. But there is a bigger point that most people on both sides of the argument miss. It’s not whether minimum wage workers should or shouldn’t be able to afford two-bedroom apartments. It’s that it’s impossible. It can not happen.
Rental properties come in various shapes and sizes. The smallest apartment in New York City is just 55 square feet! Who wants to pay $1,400 and still have to walk down the hall to use the toilet? The Obamas, on the other hand, rented out a nine-bedroom mansion in DC’s exclusive Kalorama neighborhood for around $22,000 per month in 2017. Most rental units are going to be between those two extremes. The average rent across the United States is $1,702 and the average apartment size is 897 square feet.
Why is it impossible for the minimum wage to make a two-bedroom apartment affordable? For argument's sake, let’s say that a movement to make two-bedroom apartments affordable to all full-time minimum wage workers. The median two-bedroom apartment in the US costs $1,862, but let’s round that down to $1,800. If a full-time worker is assumed to work 160 hours a month and affordable means a worker spends 40 percent or less of their pre-tax income on rent, that means minimum wage would have to increase to roughly $28 per hour to make a two-bedroom apartment affordable.
This is obviously not going to happen. But even if it did, two-bedroom apartments still wouldn’t be affordable. Why? The laws of supply and demand. If every worker can now afford to pay $1,800 a month for rent, the demand for two-bedroom apartments will rise. When demand increases, that makes prices also increase. Currently, 52 percent of apartments are either studios or one-bedrooms. That means slightly less than half (48 percent) are two-bedroom or more. All else equal, two-bedroom apartments are always going to be significantly more expensive than one-bedrooms or studios. Because apartments have a supply that is relatively inelastic in the short-run (you can’t just build a new apartment building in a short time period), landlords will always set their rents so that minimum wage workers can afford some studios and one-bedrooms, but not many (if any) two-bedrooms.
This isn’t just landlords being greedy. If minimum wage workers can afford two-bedroom apartments, then the majority of workers who make above minimum wage will also be able to afford two-bedroom apartments, and, crucially, they will be able to pay more. Business owners aren’t going to rent an apartment for $1,800 if someone else is willing to pay $2,000. This isn’t miserly, it’s common sense.
That isn’t to say rising rental prices aren’t a problem; they certainly are. The typical American is now rent-burdened according to Moody’s Analytics. It’s curious that rent-burdened is defined as when “median U.S. income is required to pay the average rent” (italics added), but that's a story for a different day. Regardless of the exact definition, rents are rising. This is largely because, if you’re not in The Netherlands, the amount of land available to build on is fixed. Pair that with overly burdensome building codes, zoning, and other government regulation, and housing is slowly becoming unaffordable for many Americans. This is a problem, and one that policymakers are only starting to take seriously.
That said, minimum wage workers are never going to be able to afford the typical two-bedroom apartment, and it’s silly to pretend otherwise.