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Thursday, June 30, 2016

Affordable Housing Is Already in Reach for Minimum Wage Workers

Most minimum wagers don't need a two-bedroom on a single salary.

A recent report from the National Low Income Housing Coalition paints a gloomy picture: nowhere in the United States can a full-time worker earning the prevailing minimum wage afford a modest two-bedroom apartment.

The report’s goal is to shed light on the gap between wages and the price of housing across the United States. It does so by calculating the housing wage — the hourly wage a full-time worker would need to earn to afford a modest apartment without spending more than 30 percent of income on rent and utilities.

The report estimates the 2016 national housing wage to be $20.30 for a two-bedroom apartment and $16.35 for a one-bedroom rental unit. Based on this estimation, the report concludes that a minimum wage earner would need to work 2.8 jobs in order to afford a two-bedroom apartment.

Yet, upon a closer look, these findings are not as shocking as the authors intend. The report’s pessimistic results are created by two unrealistic assumptions. Relax them, and the results are no longer so gloomy.

Two bedrooms is not a practical choice for a singleton making minimum wage.

Throughout the report, the authors presume that a minimum wage earner would choose to live in a two-bedroom apartment. But that is not a choice most people make. Why pay for a second bedroom when the money can instead be spent on other goods and services?

For example, when as an undergrad I made a minimum wage working the dishwashing line in the college’s cafeteria, I lived in an efficiency: a tiny bedroom, a bathroom shared with another tenant, and a kitchen shared with seven other tenants. While it wasn’t the most comfortable arrangement, it allowed me to save for a car and it motivated me to keep on investing in myself. Both factors led to a higher paying job.

One size does not fit all – literally.When it comes to housing, one size does not fit all, literally. Renting a studio or a one-bedroom apartment, getting a roommate, or moving back with one’s parents are all perfectly good choices when abundant square footage is not a priority.

The report stresses that a worker earning the federal minimum wage of $7.25 per hour would need to work 112 hours per week, or 2.8 jobs, to afford a two-bedroom apartment.

However, if we allow the minimum wage earner to live with a roommate or a spouse, who for the sake of example also earns minimum wage, then the two-bedroom apartment becomes significantly more affordable. If they in fact don’t want to spend more than 30 percent of their income on rent and utilities, each needs to work 61 hours a week to afford splitting the two-bedroom apartment. And if the two minimum wage workers choose to share a one-bedroom apartment not an unusual choice for a couple or siblings — then they need to each work 45 hours per week.

Two minimum wagers could afford an apartment while working 40 hours a week.Should they wish to work fewer hours, a greater share of their income needs to go towards rent and utilities. For two minimum wage workers sharing a two-bedroom apartment, a forty-hour week is attainable if they each spend 42 percent of their income on rent and utilities.

Dropping the assumption of a singleton living in a two-bedroom apartment makes even more sense if we consider the demographics of minimum wage earners. Based on the Bureau of Labor Statistics report, in 2015, only 3.3 percent of all wage workers earned wages at or below the federal minimum wage of $7.25 (this is equivalent to 2.17 percent of all wage and salary workers). About 45 percent of these workers are younger than 25, and 19 percent of minimum wage earners are teenagers.

Given these demographic characteristics, it is unlikely that the majority of minimum wage earners are heads of households. Rather, they are more likely to be young individuals, living with parents and working entry-level jobs in order to secure a higher paying position down the road.

Sometimes spending more than 30 percent of income on rent makes sense.

All the calculations in the report assume that the workers spend only 30 percent of income on rent and utilities. Why 30 percent and not 33, 35, or 42? Where does this number come from? And why include utilities in the 30 percent? There is really no other reason but historical path dependence.

But while spending 30 percent of income on rent and utilities might be a reasonable rule of thumb, it’s again a mistake to assume that one size fits all. In fact, there are many reasons to go above or below this number. For example, it might be reasonable to spend more on rent and utilities if you live close to work and need not worry about spending on public transportation or car ownership, or you might well spend less if you receive a raise but do not want to move.

Moreover, going with a slightly different rule of thumb that of spending one third of income on housing and just bumping the number by three percent, lowers the national housing wage for a one-bedroom rental by nine percent, from $16.35 to $14.86. This small change in assumptions results in a significant change in results, demonstrating how dependent the findings are on these restrictive and arbitrary assumptions.

Consider the causes before offering solutions.

After delivering the gloomy findings, the report moves on to policy recommendations. The authors call for increased public investments in housing programs, arguing that the problem lies in the insufficient supply of low-income housing: “Absent public subsidy, the private market does little to produce new rental housing affordable to the lowest income households.”

Local governments make low-income housing illegal. But why doesn’t the market deliver affordable options? We don’t worry about the market failing to supply affordable furniture or affordable clothing. Numerous successful companies made it their mission to deliver affordable goods to low-income consumers.

So why is there no Walmart-like business model for affordable housing? Research points to land-use restrictions as a main cause for the under-supply of affordable housing. Zoning codes, building codes, and a myriad of other policies make affordable housing illegal. Increased government spending is not going to accomplish much as long as the regulatory barriers remain in place.