The real lesson from the ‘fight for $15’? Don’t do it

The rent control ordinance passed in St. Paul last November has been a disaster. One of the strictest rent control measures in the United States, it capped annual rent increases at 3% with no allowance for inflation or exemption for newly built properties.

A rent control law is a price ceiling. It sets a price above which it is illegal to rent accommodation, and Econ 101 would tell you to expect a higher quantity of housing demanded and lower quantity supplied than would be the case at the market rate. This leads to further shortages, exactly the problem the measure was intended to fix in the first place.

It might be fashionable these days to pooh-pooh Econ 101 as simplistic, abstract theorizing, “zombie economics” removed from the complexities of the real world or, even worse, nothing but rationalizations for particular economic policies.

But the predictions of Econ 101 have been vindicated in St. Paul. 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 the city is down over 80% compared to the same period during the previous year. By contrast, construction is up in Minneapolis. St. Paul’s mayor, Melvin Carter, who supported the ordinance, is now desperately trying to get it amended to exclude new builds.

Given this disastrous outcome, the recent column ‘We need strong rent control: Lessons from the Fight for $15’ was puzzling. In fact, it was doubly puzzling because recent research from the Federal Reserve Bank of Minneapolis found that the ‘Fight for $15’ has also been a bust in the Twin Cities, exactly as Econ 101 would predict.

A minimum wage is a price floor, setting a price below which it is illegal to buy or sell labor. Econ 101 tells you that, ceteris paribus, this will, if set above the market price for the good or service in question, lead to a lower quantity demanded and greater quantity supplied than would otherwise be the case, leading to an excess of supply over demand — less employment, in other words.  

In Minneapolis, from January 2018 to March 2020, the minimum wage rose from $10 an hour to $12.25 an hour for employers with more than 100 workers, with the long-term goal of reaching $15 an hour by 2022 for large businesses and 2024 for smaller ones with less than 100 workers. The Minneapolis Fed’s research found that, over the same period, the number of jobs at “full-service” restaurants — i.e., sit-down establishments — dropped in the city by 12 percent more than it would have if the minimum wage had not been increased while jobs at “limited service restaurants” — counter-order places — fell 18 percent.

St. Paul’s minimum wage hike didn’t actually kick in until 2020, but the research found “anticipation effects” in the city. The minimum wage in the city rose to $11.50 for big companies with more than 100 workers, and to $10 for small businesses with 100 employees or less with the aim of reaching a $15 minimum wage for all businesses by 2028. From 2018 to 2019, the Federal Reserve researchers found that anticipation of the minimum wage boost appears to have driven declines in jobs, hours, and overall earnings for restaurant workers.

To be sure, Econ 101 simplifies the real world. That is what models do. They abstract from reality to isolate underlying factors. That is why there is a good-sized body of empirical literature, supporting the theory, on the harmful effects of both minimum wage laws and rent controls. This isn’t to say that we cannot do anything to raise wages or make housing more affordable, but we have to attack the problems that actually make housing expensive and keep wages low — not the relative prices of accommodation and labor, which are just the symptoms.