Tuesday, 4 March 2025

Local minimum wages and low-quality housing rents in Japan

In this 2023 post, I discussed the impact of higher minimum wages on homelessness. Part of the story related to housing rents:

There are a couple of reasons to expect that higher minimum wages might increase homelessness. If minimum wages decrease employment (a result that is contested, but I believe it is likely given the galaxy of literature we have to date; again, see the links at the end of this post), then higher minimum wages may directly increase the risk of people becoming homeless. That's because when low-income people workers lose their jobs, they may no longer be able to afford to pay rent, and may lose their homes. Second, if minimum wages increase incomes for those that are not made unemployed, they may increase the demand for housing, pushing up rents. This may indirectly increase the risk of people becoming homeless, who can no longer afford the higher market rent.

The research that I referred to in that post found that higher minimum wages increased homelessness, and that they also increased housing rents, consistent with the mechanism outlined above. However, we shouldn't believe just a single paper's research findings. This 2021 article by Atsushi Yamagishi (Princeton University), published in the journal Regional Science and Urban Economics (ungated earlier version here), provides some additional evidence, this time from Japan.

Japan provides an interesting case study for examining the effects of the minimum wage on housing, because:

Japan has forty-seven prefectures and each has a different minimum wage rate. There is no difference in the minimum wage rate within a prefecture...

And on top of that, each prefecture has little control over its local minimum wage. Yamagishi notes that:

...the minimum wage setting in Japan is highly centralized and unresponsive to trends in local housing markets due to institutional features. Japanese prefectural minimum wages are determined by the following process. First, the central government classifies prefectures into four categories, and it assigns the targeted amount of minimum wage increase to each category. The categorization is reviewed only once every five years and changes in the classification are rare.

Yamagishi uses data from 2007 to 2013, and exploits an interesting natural experiment, where:

From 2007 to 2012, a new consideration took the primary role in setting minimum wages due to the national policy change... after the revision of the Minimum Wage Law in 2007, the primary consideration in setting the minimum wage rate became closing the gap between the quality of life of minimum wage workers and people relying on Public Assistance (seikatsu-hogo, PA henceforth)...

Since the gap was generally larger in urban areas, the policy resulted in a plausibly exogenous minimum wage increase in urban prefectures...

So, not only is there variation in minimum wages across prefectures, and that variation is not related to local housing markets, there is a change in the variation driven by the policy change. Yamagishi uses data on advertised apartment [*] rents from At Home, "one of the most popular online real estate search engines in Japan". Using both an event study research design and a difference-in-differences design, Yamagishi found that:

...low-quality apartments experience around a 2.5-4.5% rent increase in response to a 10% minimum wage increase.

When looking at differences by apartment quality (proxied by the age of the apartment, with 'old' apartments being over 25 years old and 'very old' apartments being over 35 years old), Yamagishi found that:

An old apartment experiences a rent increase of around 3.3% when the minimum wage increases by 10%, which is statistically significant at the 1% level. A very old apartment experiences an increase of around 4%, which is also significant at 1% level. Overall, the result reveals the larger impact on the rents of lower-quality apartments...

Of course, the key point here is that workers on the minimum wage are more likely to live in low-quality apartments than in higher-quality apartments. So, the takeaway from this paper is that higher minimum wages may make some workers better off in terms of higher wages (while also considering the disemployment effects of the higher minimum wage), but that the gains of those workers would be offset somewhat by higher rents. Yamagishi estimates that landlords gain between 7.5-13.5 percent of the increased minimum wage, but the assumptions necessary to arrive at that estimate are a little difficult to justify.

Nevertheless, the overall point stands. The minimum wage workers lose some of their higher minimum wage to higher rents.

[HT: Marginal Revolution, back in 2023]

*****

[*] As an interesting aside, Yamagishi notes that in Japan, 'apartments' are generally low quality. A high quality apartment is referred to as a 'mansion' (see here).

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