Kansas City rent strike rebalances relative bargaining power towards tenants

Today in my ECONS101 class, I covered search models of the labour market. In these models, a matching between a worker and an employer creates a surplus, which is then shared between the worker and employer depending on their relative bargaining power. The greater the worker's relative bargaining power, the greater the share of the surplus the worker will claim, meaning that wages will be higher. The lesser the worker's relative bargaining power, the lesser the share of the surplus the worker will receive, meaning that wages will be lower.

Search models are not just useful for thinking about labour markets though. They can be used in any situation where two (or more) parties are matched together in a way that creates a surplus, which is then shared between them. A joint venture between firms is an example. So is a marriage. In both cases the parties match together, create a surplus, and then share that surplus based on their relative bargaining power. A further example exists in the market for rental housing. Landlords and tenants are matched together. That matching creates a surplus, which is shared between them. And relative bargaining power matters, as this Yahoo!News article from the end of last year (originally published in the Washington Post) demonstrates:

In the two years she has lived at Bowen Tower, Cynthia Barlow’s apartment has flooded, been plagued by mold and been infested with cockroaches. The building’s heat stopped working. When the elevators broke over the summer, emergency workers carried a sick neighbor down 10 flights of stairs.

Meanwhile, Barlow’s rent for the two-bedroom unit increased from $993 per month to $1,213.

Growing frustrated, she hung fliers in the elevators and hosted potlucks, persuading a majority of tenants in the 90-unit building to join the Bowen Tower Tenant Union and stop paying rent until conditions improved. So far, they’ve won a meeting with the landlord, and a judge has knocked thousands of dollars off the rent debt of one resident facing eviction.

“I got tired of being treated the way I was treated,” Barlow said.

The rent strike is part of a strategy that housing activists have started to replicate in midsize cities across the country.

When tenants organise themselves into a tenant union, then ceteris paribus (holding all else equal) that increases the tenants' relative bargaining power with the landlords. If the tenants were to all leave their apartments, then the landlord has to search for new tenants, which is costly. Now, an individual tenant could threaten to move out, but filling one apartment with a new tenant is relatively easy. When an entire block of tenants makes the same threat, the landlord is facing serious disruption. More importantly, a rent strike means that, instead of losing or negotiating with one tenant at a time, the landlord faces coordinated action including withholding rent, legal disputes, repair demands, and public pressure from many tenants at once.

The tenants' increased bargaining power (due to unionising) should result in lower rents and improved maintenance of the apartments. The way this worked in practice was that tenants, feeling more powerful with the backing of other tenants, stopped paying rent. However:

Barlow is scheduled for eviction court in January, and Bowen Tower management hasn’t renewed her lease.

There is only so far that tenants can push their greater relative bargaining power, particularly where alternative affordable housing is scarce and legal protections are weak. However, the Bowen Tower case also shows why collective action may matter. Ultimately, the tenants appear to have prevailed and won substantial concessions. This later article notes that the rent strike ended after four months, when the landlord promised repairs and lower rents, and after tenants had withheld nearly US$110,000 in rent. 

Tenant unionisation does not guarantee success, and the risks to tenants can be substantial. But it does mean that tenant unions can shift the bargaining outcome, and the share of the surplus, especially when they are able to sustain coordination long enough to make the landlord’s alternative more costly than negotiation.

[HT: New Zealand Herald]

Two papers show the bad, and some good, of rent control in San Francisco

I have been talking with my ECONS101 class this week about rent controls, which is a topic that I have blogged about many times before (see the links at the end of this post). Economists really dislike rent controls, sometimes in deliberately hyperbolic terms. In one prominent case, the Swedish economist Assar Lindbeck was quoted as saying:

“Rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Lindbeck's statement is based on the evidence that shows the negative impacts of rent controls. One example is described in this 2025 article by Eilidh Geddes (University of Georgia) and Nicole Holz (Northwestern University), published in the Journal of Housing Economics (ungated earlier version here). They looked at the impact of a large-scale rent control expansion in San Francisco in 1994, which removed an exemption from rent control for small (less than five units) owner-occupied buildings built before 1980, on evictions.

Their data are the number of eviction notices, as well as wrongful eviction claims and 'owner move-in' eviction notices at the zip code level, from 1990 to 2010. They apply a continuous treatment difference-in-differences, which essentially compares the change in evictions (or other measure) between zip codes that were more affected by the removal of the exemption and those that were less affected. Their measure of exposure to the treatment is the number of housing units in the zip code that became exposed to rent control policies after the passage of the voter referendum in late 1994. In zip codes where more housing units were affected by the change, we would expect to see greater impacts than in zip codes where fewer housing units were affected. One limitation of this is the data source that Geddes and Holz use, which is based on building data from 1999, five years after the change was implemented. However, they show that three main sources of problems (demolition of buildings between 1994 and 1999, splitting of land parcels, and construction that changed the number of units in each building), do not have much impact on the estimated number of units affected (and so, don't have a large impact on the treatment variable).

In their main analysis, Geddes and Holz find:

...an 83% increase in eviction notices filed with the Rent Board and a 125% increase in the number of wrongful eviction claims for ZIP codes with the average level of new exposure to rent control...

These effects are large and economically significant. We find an annual effect of an increase of 20.07 eviction notices per 1000 treated units in a zip code. Over the six years in our post period (1995–2000), this translates roughly into 12% of newly rent controlled units receiving an eviction notice.

So, the expansion of rent control leads to an increase in evictions. Geddes and Holz also find that the effects:

...are concentrated in low-income areas. These areas are not necessarily those that saw the largest increases in aggregate rents during the 1990s, suggesting that landlords may be more willing to engage in eviction activity in places where there are fewer resources to fight that behavior.

Geddes and Holz caution against taking a broad interpretation of their results though, as the removal of the exemption in 1994 primarily affected small landlords, who are often 'mom and pop' landlords and are able to take advantage of 'owner move-in' eviction provisions that are not available to large corporate landlords. However, the results are consistent with the broader literature, which suggests that tenants may be negatively affected by rent controls.

But not in all ways, it appears. In a more recent article published in the Journal of Health Economics (open access), Geddes and Holz look at the impact of the same 1994 expansion of rent control in San Francisco on intimate partner violence (IPV). They first note that that the effect of rent control on IPV is theoretically ambiguous, and there are two competing models with different predictions:

In the financial strain model, lower housing costs will decrease financial stress, leading to lower levels of violence. The effect of housing policies will thus depend on whether they lower costs for couples. However, in a bargaining model, there is a crucial distinction between policies that shift housing costs overall and those that shift the relative costs of housing inside and outside of the relationship. Policies that decrease housing costs overall will change the amount of resources in the relationship to be bargained over, but will not shift the bargaining power in the relationship. However, policies that decrease housing costs inside the relationship relative to those outside of the relationship will change the attractiveness of the outside option, shifting bargaining power away from the woman.

The empirical setup in this research is the same as for their earlier research on evictions. The difference is that the outcome variable of interest is IPV, measured as:

...the number of hospitalisations resulting from assaults that comes from California’s Department of Health Care Access and Information (HCAI, formerly OSHPD) from 1990–2000.

In their main analysis, Geddes and Holz find that:

...for every one percent increase in exposure to rent control in a ZIP code, hospitalized assaults on women decline by 0.08 percent. In levels, this translates to an almost 10 percent decrease in violence against women for the average ZIP code.

They find no corresponding decrease in assaults on men, which suggests that their results are not driven by an overall decline in assaults (including non-IPV assaults). They also find no effect on reported accidents, which suggests that their results are not driven by changes in the propensity to report IPV. Interestingly, they also find:

...no evidence of changes in household size or composition, suggesting that our results are driven by changes in violence within relationships rather than changes in cohabitation or relationship dissolution.

Overall, their results are most consistent with the financial strain model of IPV. Based on that model, we interpret these results as showing that rent controls, by reducing housing costs (and it is worth noting that housing costs in San Francisco are, and have been for some time, very high), decrease conflict within intimate relationships, and decrease IPV.

So, at least there is some evidence for positive effects of rent control. These results also sit alongside earlier evidence from the same rent control expansion, which showed short-run gains for incumbent tenants, but long-run reductions in the supply of rental housing units, as well as an increase in inequality. However, few people are advocating for rent control policies in order to reduce intimate partner violence. And benefits in terms of reduced violence have to be weighed against all of the other negative consequences of rent control policies, many of which are outlined in the posts linked below.

Read more:

• Why rent controls have worse effects over longer time horizons
• The deadweight loss of rent control
• The deadly consequences of rent control in Mumbai
• Rent control and inequality in San Francisco
• Rent control and the redistribution of wealth
• Rent control and vacant properties in India
• Rent control according to Seinfeld
• There should be no debate at all about rent controls
• Rent controls make many tenants worse off in the Netherlands

The supply-side story behind falling meth prices in New Zealand

Chris Wilkins, Marta Rychert, and Robin van der Sanden (all Massey University) wrote an article in The Conversation last month about the price of methamphetamine:

Methamphetamine has become dramatically cheaper over the past seven years, even as authorities report record seizures, according to the latest New Zealand Drug Trends Survey.

The annual online survey of over 8,800 people who use drugs shows wholesale prices of the illegal and harmful substance (per gram sold to dealers) have fallen by 41%, while street-level “point” prices (0.1 gram retail deals) have dropped by 27%.

The decreasing price of meth is not a new phenomenon. In fact, I wrote about it last year. Wilkins et al. try to tease out the reason underlying the decreasing price. Based on a simple supply and demand model of the market for meth, there are two main possibilities: an increase in supply, or a decrease in demand. Wilkins et al. go through a number of plausible factors on both sides of the market, dismissing each in turn, including:

• sellers feeling that there is less risk of arrest (which would increase supply), but Police report record seizures, which Wilkins et al. argue seems to rule that out;
• less strict enforcement by Police against people found with small quantities of drugs (which would increase supply, but probably demand as well), but that wouldn't affect large sellers;
• decreasing production costs (which would increase supply), but production costs only make up a fraction of the street price; and
• a decrease in buyers (which would decrease demand), but wastewater data suggests that meth consumption has increased.

The last point, that meth consumption has increased alongside the decrease in price, points strongly to an increase in supply as the main change. That doesn't rule out a change in demand, but the increasing consumption tells us that the increase in supply must be greater than any possible decrease in demand. But if it isn't lower risks of arrest, weaker enforcement, or decreasing production costs, that is causing supply to increase in the New Zealand meth market, then what is? Wilkins et al. point to:

...new global sources of methamphetamine supply.

New Zealand and Australia have traditionally sourced methamphetamine from lawless regions of Asia known as the Golden Triangle. More recently, however, growing seizures have been linked to Mexican drug cartels, often transiting through Canada.

Australian authorities say these cartels can supply methamphetamine at less than one-third the price of Asian producers and that about 70% of seized meth now originates from North America.

It may also explain the rising supply of cocaine in New Zealand, with Mexican cartels deeply involved in global cocaine trafficking.

So, new sources of meth have increased the supply, decreasing the equilibrium price, and increasing the quantity of meth traded in the New Zealand market. Wilkins et al. also point to competition:

On top of this, digital drug markets – including darknets and social media sales – may be lowering the cost of finding alternative sellers and better deals, increasing competition and pushing prices down.

Economists often think of competition as a good thing. However, in the market for illegal drugs, that might not necessarily be the case. How can government best respond? Fighting the supply side of the market alone is unlikely to be successful, as I have noted before. The increased supply from new sources make this even more challenging. A renewed focus on reducing demand is necessary as well, and would likely be much more effective in the long run.

Read more:

• Police are not winning the P war - they need to focus on demand
• Evidence that the supply of methamphetamine is increasing
• The coronavirus lockdown and the New Zealand market for illegal drugs
• The increase in methamphetamine use in New Zealand has been driven more by supply than demand

The Strait of Hormuz blockade, trade passes in the Panama Canal, and the cost of imported goods

The New Zealand Herald reported last month:

The war in the Middle East has boosted demand to move vital cargo through the Panama Canal to such an extent that one vessel carrying liquefied natural gas (LNG) paid US$4 million ($6.7m) to skip the line and avoid a wait that can take up to five days, according to an official report.

A surge in such payments has been recorded since the US-Israeli attacks on Iran began February 28, which led to the blockade of the Strait of Hormuz, a critical waterway for one-fifth of the world’s oil and natural gas exports from Gulf countries.

The impact on the price of transits through the Panama Canal is shown in the diagram below. Before the Strait of Hormuz was blockaded, the market for Panama Canal transits was in equilibrium, where demand DA meets supply SA. The equilibrium price was PA, and the quantity of transits was QA. The blockade increased the demand for Panama Canal transits from DA to DB, increasing the equilibrium price of transits from PA to PB, and increasing the quantity of transits from QA to QB.

This increase in the price of Panama Canal transits doesn't just affect the cost of transporting oil or natural gas. Other ships must also pay the higher price. That increases the cost of shipping, which will flow through to the prices of imported goods, as shown in the diagram below. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of imported goods traded of Q0. The higher cost of Panama Canal transits increases the 'costs of production' of imported goods, which decreases supply to S1. This increases the equilibrium price of imported goods to P1, and reduces the quantity of imported goods traded to Q1.

So, it's not just oil and natural gas prices that will be pushed up by the blockade of the Strait of Hormuz. The resulting higher shipping costs will flow through to all sorts of other goods that are traded internationally and require shipping, including and especially those passing through the Panama Canal.