Housing Demand & Affordability for Low-Wage Households: Evidence from Minimum Wage Changes Sam Hughes Wharton Virtual AREUEA 2020
Agenda 1. Research questions & motivation 2. Empirical strategy 3. Results 4. Conclusion
Housing affordability & the “Engel Curve”
Connected to a fundamental theoretical issue Cobb- Douglas’ Engel curve is flat; income has no causal effect on rent-to-income ratios. Differences are caused by changes in preferences (or maybe prices). (DiPasquale & Murray, 2017)
Using minimum wage to measure causal effect of premanent income increase on housing expenditure share If Engel curves are sloped, we may need non-homothetic models of housing demand. Want to measure: income elasticity of expenditure share
Connecting policymaking on housing & minimum wage
Connecting policymaking on housing & minimum wage
Research Questions 1. What is the effect of minimum wages on housing demand & consumption? • 3 main outcomes: rent; household income; rent-to-income ratio • Test homotheticity assumption: Is expenditure share constant? • In the paper, derive sufficient statistics-style formula for the welfare change 2. How do minimum wages affect rental prices? • Potential policy trade-off: MW helps those whose incomes increase; price increase may hurt others • Test of heterogeneity w.r.t. housing supply elasticity
Preview of main results A 10% increase in minimum wages: • increases income for affected households by 1.9% • increases housing consumption by 0.5% • decreases rent-to-income ratios by 1.4% • has a near-zero average effect on rental prices nationally • the rental price effect is heterogeneous w.r.t. local housing supply elasticity, so rental prices rise more in cities where it is difficult to build housing
Contribution 1. Consumption & associated effects of minimum wage ➢ Aaronson, Agarwal & French (2012); Alonso (2016); Dautovic, Hau & Huang (2017) ➢ Employment/poverty: Card & Krueger, 2000; Dube, 2018; Cengiz, Dube, Lindner & Zipperer, 2019 ➢ Other outcomes… crime ( Fone, Sabia & Cesur, 2019), health (Wehby, Dave & Kaestner, 2016), credit (Dettling & Hsu, 2017) etc. 2. Insights into the fundamentals of housing demand ➢ How inelastic is housing demand (e.g. Mayo, 1981)? How elastic is the expenditure share? ➢ Is Cobb-Douglas good enough? • YES: Davis & Ortalo-Magné (2011); Moretti (2013); Eeckhout, Pinheiro & Schmidheiny (2014); Diamond (2016); Monte, Redding & Rossi- Handberg (2018); Nathanson (2019); Molloy, Nathanson & Paciorek (2019); Rappaport (2019); Hsieh & Moretti (2019) • NO: Albouy, Ehrlich & Liu (2016); Ganong & Shoag (2017); Tsivanidis (2019); Couture & Handbury (2018); Couture, Gaubert, Handbury & Hurst (2019); Atkin, Faber, Fally & Gonzalez-Navarro (2019) 3. Price effects of minimum wage ➢ MW + Prices in general: Wadsworth (2010); Aaronson et al. (2012), Leung (2018), and Renkin et al. (2019). ➢ MW + Migration/Spatial eqm: Monras (2018); Perez Perez (2018); Zhang (2018) ➢ MW + Prices + Spatial eqm: Yamagishi (2019); Tidemann (2018); Agarwal, Ambrose & Diop (2019)
Agenda 1. Research questions & motivation 2. Empirical strategy 3. Results 4. Conclusion
Empirical Approach Data: ACS 2005-2017; renter households whose household head is working in private sector Variables: household income, rent, imputed wage (usual hours; weeks worked); • includes state-by-occupation & occupation-by-year FEs, state-specific linear time trend & Census region by year FE Triple difference: 1. pre-/post-MW change; 2. across states MW change; 3. low-wage vs. higher-wage workers ln 𝑧 𝑗,𝑡,𝑢 = 𝜄 𝑡 + 𝜄 𝑢 + 𝜒 ln 𝑁𝑋 𝑡,𝑢 + 𝛿 𝟐 wage 𝑗 < 𝑏𝑔𝑔 𝑡,𝑢 + 𝛾 ln 𝑁𝑋 𝑡,𝑢 ∗ 𝟐 wage 𝑗 < 𝑏𝑔𝑔 𝑡,𝑢 + 𝜁 𝑗,𝑡,𝑢 year individual state Binary variable: =1 if household head below Common min. Interaction minimum wage effect X percentile in state-year wage distribution; wage effect Main coefficient of interest: 𝛾 X defined using average percentile where wages are <100% of state min. wage
Minimum Wage Variation Using ACS data Using ACS data from 2005-2017 from 2005-2017
Agenda 1. Research questions & motivation 2. Empirical strategy 3. Results 4. Conclusion
Results ln(rent) ln(hhincome) ln(rent/hhincome) (1) (2) (3) (4) (5) (6) -0.0106 Common Effect: ln(MW) (0.0328) 0.189*** Interaction Effect: ln(MW)*Affected (0.0322) -1.104*** Affected (0.0652) Observations 2,248,921 R-Squared 0.291 100% Affected Wage Relative to MW 16 Affected Wage Percentile Cutoff Two-Way FE X State-Year Linear Trend X $1,452.44 e^(Mean of Outcome Below Affected Pctile) $3,857.21 e^(Mean of Outcome Above Affected Pctile)
Results ln(rent) ln(hhincome) ln(rent/hhincome) (1) (2) (3) (4) (5) (6) -0.00783 -0.0106 0.00273 Common Effect: ln(MW) (0.0235) (0.0328) (0.0241) 0.0543** 0.189*** -0.135*** Interaction Effect: ln(MW)*Affected (0.0246) (0.0322) (0.0361) -0.213*** -1.104*** 0.892*** Affected (0.0497) (0.0652) (0.0689) Observations 2,248,921 2,248,921 2,248,921 R-Squared 0.327 0.291 0.158 100% 100% 100% Affected Wage Relative to MW 16 16 16 Affected Wage Percentile Cutoff Two-Way FE X X X State-Year Linear Trend X X X $682.73 $1,452.44 47.0% e^(Mean of Outcome Below Affected Pctile) $854.23 $3,857.21 22.1% e^(Mean of Outcome Above Affected Pctile)
Results ln(rent) ln(hhincome) ln(rent/hhincome) (1) (2) (3) (4) (5) (6) -0.00783 -0.00619 -0.0106 -0.0158 0.00273 0.00965 Common Effect: ln(MW) (0.0235) (0.0237) (0.0328) (0.0328) (0.0241) (0.0244) 0.0543** 0.0256 0.189*** 0.130*** -0.135*** -0.104*** Interaction Effect: ln(MW)*Affected (0.0246) (0.0234) (0.0322) (0.0277) (0.0361) (0.0254) -0.213*** -0.155*** -1.104*** -0.893*** 0.892*** 0.738*** Affected (0.0497) (0.0473) (0.0652) (0.0585) (0.0689) (0.0513) Observations 2,248,921 2,248,921 2,248,921 2,248,921 2,248,921 2,248,921 R-Squared 0.327 0.328 0.291 0.293 0.158 0.157 100% 125% 100% 125% 100% 125% Affected Wage Relative to MW 16 25 16 25 16 25 Affected Wage Percentile Cutoff Two-Way FE X X X X X X State-Year Linear Trend X X X X X X $682.73 $688.35 $1,452.44 $1,694.43 47.0% 40.6% e^(Mean of Outcome Below Affected Pctile) $854.23 $872.27 $3,857.21 $4,081.01 22.1% 21.4% e^(Mean of Outcome Above Affected Pctile) Robustness Results for (individ. controls) retail workers
Results: Dynamics ln(rent/hhincome) ln(rent) ln(hhincome) Dynamics Reg Dynamics for Coefficients retail workers
Results: Heterogeneity by housing supply elasticity ln(rent) ln(hhincome) ln(rent/hhincome) (1) (2) (3) (4) (5) (6) -0.0286 0.0809* Common Effect: ln(MW) (0.0304) (0.0409) 0.0241 0.0282 Interaction Effect: ln(MW)*Affected (0.0255) (0.0242) -0.0590*** Interaction Effect: ln(MW)*Saiz Elasticity (0.0166) -0.149*** -0.153*** Affected (0.0507) (0.0486) 1,586,930 1,586,930 Observations 0.316 0.328 R-Squared 100% 100% Affected Wage Relative to MW 16 16 Affected Wage Percentile Cutoff X X Two-Way FE X X State-Year Linear Trend
Results: Heterogeneity by housing supply elasticity ln(rent) ln(hhincome) ln(rent/hhincome) (1) (2) (3) (4) (5) (6) -0.0286 0.0809* -0.00495 0.0601 -0.0237 0.0208 Common Effect: ln(MW) (0.0304) (0.0409) (0.0376) (0.0451) (0.0261) (0.0234) 0.0241 0.0282 0.204*** 0.206*** -0.180*** -0.178*** Interaction Effect: ln(MW)*Affected (0.0255) (0.0242) (0.0398) (0.0386) (0.0486) (0.0490) -0.0590*** -0.0350*** -0.0239*** Interaction Effect: ln(MW)*Saiz Elasticity (0.0166) (0.0107) (0.00773) -0.149*** -0.153*** -1.152*** -1.154*** 1.003*** 1.001*** Affected (0.0507) (0.0486) (0.0805) (0.0781) (0.0922) (0.0932) 1,586,930 1,586,930 1,586,930 1,586,930 1,586,930 1,586,930 Observations 0.316 0.328 0.296 0.297 0.162 0.162 R-Squared 100% 100% 100% 100% 100% 100% Affected Wage Relative to MW 16 16 16 16 16 16 Affected Wage Percentile Cutoff X X X X X X Two-Way FE X X X X X X State-Year Linear Trend
Concluding thoughts • Evidence that minimum wage: raises income, may raise housing consumption, decreases rent-to-income ratios • Suggests: income-inelastic demand; non-homothetic preferences • Little average effect on rental prices, but significant heterogeneity in effects by housing supply elasticity • Suggests: imperfections in labor & housing markets interact • In the paper, theory-motivated formula for thinking about welfare change using the income elasticity of housing expenditure share
Goodbye! If you have idle or constructive thoughts or ideas, my email is: skhughes@wharton.upenn.edu
There is also an Appendix!
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