Compassion compromised by contradictions | AIER

“California has some of the highest housing costs in the nation, the most expensive gas and the third highest overall cost of living.” This was the main premise of Isaac Lozano “Workers need a living wage”, in a recent Los Angeles Times editorial, advocating a higher minimum wage in the state. I have often noticed that the same premise is used to justify rent controls. Apparently, the high costs of living, largely caused by government taxes, regulations and restrictions, justify even more coercion in the labor and housing markets. Unfortunately, those government “solutions” are not only based on flawed logic, they are mutually contradictory.

Both the minimum wage and the rent control, although one raises prices and the other pushes them down, reduce the amount traded in those markets. This makes them counterproductive “solutions” for those unable to sell sufficient labor services or purchase sufficient housing services. But the rhetoric employed conceals how they make the central problem worse.

For low-skilled minimum wage defenders, frame the problem as “If you could earn more per hour, you’d be better off.” This is probably true. But it assumes that wanting to work more with higher wages means that it will be to be able work harder at higher wages when those wages are the result of government dictation rather than market forces.

Low-skilled workers would be willing to work more at higher wages, all things being equal (the law of supply). Higher wages, however, reduce the number of services employers will hire (the law of demand). Therefore, the greater willingness of low-skilled workers to offer their services at higher minimum wages is irrelevant, as fewer jobs will be available. Instead of selling more services at higher wages, they will actually be able to sell fewer services, and some may even be completely excluded from work.

Symmetrically, rent control advocates frame the problem as “If you could rent for less, you’d be better off.” This is probably true. But it assumes that wanting to rent more housing for a lower price means that it will be to be able rent more for a lower price, when these rents are the result of government dictation rather than market forces.

Rent control will increase the amount of renters who want to “buy” (the law of demand). However, lower rents reduce the number of units owners are willing to offer (the law of supply). Therefore, increasing the desired amount of housing is irrelevant, as rent control makes less rental housing available. Instead of being able to consume more housing with lower rents, renters will receive fewer housing and some may very well end up homeless.

In addition to worsening the central problems facing families financially short of the labor and housing markets, the rhetoric for higher minimum wages shows the glaring error in the conflicting rhetoric for rent control, and vice versa.

If higher compulsory wages increase the willingness of workers to offer labor services, lower wages must reduce the willingness of workers to offer labor services. But if lower wages reduce the willingness of workers to offer labor services, then the price caps of rent control must similarly reduce the willingness of landlords to provide housing. If so, rent control will limit rather than expand tenants’ housing options.

Similarly, if lower rents by law increase people’s willingness to rent housing, higher rents will reduce their willingness to rent housing. But if higher rents would reduce their willingness to rent housing, then higher minimum wages must also reduce employers’ willingness to hire low-skilled workers. If so, the minimum wage will limit rather than broaden the labor market options of low-skilled workers.

The cognitive dissonance between the minimum wage rhetoric and that of rent control reveals that those mutually inconsistent positions cannot both be good policy. But they have something in common that makes them less effective at what advocates claim is their goal. Both increase discrimination against the poor, the least skilled and other disadvantaged groups, so that there will be even fewer jobs and housing available to those groups.

The surplus of low-skilled workers at higher minimum wages reduces the cost for an employer to reject any candidate with any undesirable trait in his eyes (including lower skills), because there are enough candidates for jobs available without that trait. Likewise, the shortage of rented housing under rent control reduces the cost for a landlord to reject a particular applicant with any undesirable characteristics in his eyes (including greater chances of non-payment).

Advocates of the minimum wage and rent control justify both as compassionate. But they ignore both the logic and the far from compassionate violations of the property rights of employers and enforced landowners. Despite these coercive abuses, both also present low-income individuals and families with fewer options, harming many. And compassion cannot justify hurting those whose interests you are trying to promote.

Gary M Wales

Gary M Wales

Dr Gary Galles is Professor of Economics at Pepperdine.

His research focuses on public finance, public choice, business theory, the organization of industry and the role of freedom, including the views of many classical liberals and founders of America.

His books include Pathways to policy failure, Defective premises, Bad policies, Apostles of PeaceAnd Lines of Freedom.

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