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The unintended consequences of price ceilings and price floors

Over the last week or so, I’ve written about rent controls and minimum wages.

In the jargon of economics, rent controls are examples of ‘price ceilings‘ and minimum wages are examples of ‘price floors‘. Both treat the symptoms of a problem – high rents and low wages – without doing anything about the underlying causes – excessive fees and regulations in the case of high housing costs and low labor productivity in the case of low wages. Unsurprisingly, neither policy has the effects intended.

But they do have effects. And, as the policies are opposites, they have opposite effects.

Rent controls try to remedy an excess of demand relative to supply by holding down the price. This leads to an even greater excess of demand relative to supply, exacerbating the problem. This is why the Swedish economist Assar Lindbeck said that “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Minimum wages try to remedy a shortage of demand for unskilled labor relative to supply by raising the price. This simply reduces the demand for that labor. That can manifest itself in layoffs, or in buying less labor from the same number of workers – cutting their hours, as happened in Seattle.

The idea that there is a magic legislative wand to wave to solve these underlying issues is a tempting one. But it isn’t very helpful if we are looking to actually solve problems of low pay or high housing costs. Solving these is hard work, but it will have the results we want. In public policy, magic wands are no substitute for hard work.

John Phelan is an economist at the Center of the American Experiment.