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Minimum Standards

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Over at Marginal Revolution, my colleague Alex Tabarrok is in an internet shouting match [2] over whether landlords should be required to provide basic amenities that would make their apartments “habitable”—hot water, air conditioning and so on. Alex argues that such requirements make the apartments more expensive and potentially give tenants attributes that they would not be willing to pay for. His critics argue that in a world of monopoly power and a world where tenants frequently have no bargaining power, then there are surely benefits from such laws that prevent tenant exploitation.

Alex makes an excellent point that even when you accept the argument that there is monopoly power, minimum standards still make tenants worse off. But I want to bring up another more basic observation. Are his critics right that the world we live in is inhospitable to renters? Does the monopoly power of landlords allow renters to be exploited?

When I give lectures outside of the university, I often ask my audience to guess the percentage of the work force that earns the minimum wage or less. The median answer, across a wide array of educated audiences (journalists, congressional staffers, law professors) is very stable. The median answer that I get in these surveys is between 20% and 25%. That’s the median. So half of the audience thinks it’s higher. A substantial number answer 50%. The actual number is about 3%.

I once asked a group of law students why America’s standard of living is higher than Mexico’s. A common answer was that we had a minimum wage, Mexico did not. I suspect Mexico has a minimum wage, but never mind. The real problem is that when 97% of the American work force earns more than the minimum wage, it’s hard to make the case that regulations keep wages high. Competition keeps wages high. Your world view may be that employers always have the upper hand, that employees always bargain from weakness, but if that’s true, it sure is hard to explain that 97% number. Why do those rapacious employers pay so much more than they have to? (As for the argument that it’s labor unions, another common answer from the law students to explain our standard of living being higher than Mexico’s, unions are about 10% of the private work force. That proportion has been falling steadily for decades as compensation has risen steadily. And see the previous post [3] by Don on the issue of whether labor immobility allows workers to be exploited.)

Do we need to require cars to have brakes? Steering wheels? Windshields? Wheels? How about CD players? Drink holders? Automatic locks? Remote locking and unlocking? The widespread provision of these amenities comes from competition among sellers to find customers.

To return to the landlord case, the challenge of finding a nice apartment in a big city is precisely because landlords offer the amenities they do. If there were no habitability regulations that required hot water, air conditioning and whatever else, do you think landlords could get away without offering those amenities? You don’t think they’d compete with each other they way employers do for employees, the way car makers do for buyers, by actually trying to give their customers what they want?

A final point. One hundred years ago apartments had no air conditioning. Only a portion had indoor plumbing or non-shared bathrooms. Few had iceboxes. None had refrigerators. I don’t know if hot water was common, but you get the idea. Why did the world of renting change? I suspect a lot of people would say it’s because government required landlords to be decent human beings. But the right answer is that the world of apartments changed because we as a nation got wealthier. Amenities that were once luxuries or were once unavailable are now considered necessary to make an apartment habitable. That change occurred because the poorest American can now afford what once were luxuries. A landlord today who offers a nineteenth century tenement will have no takers.

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