Renter wage gaps reflect desperate search for affordable housing
Happy Friday! For newer subscribers, please note that I try to publish twice a week. Tuesdays are for regular economic updates, and Fridays highlight a special economic topic relevant to IE residents.
This week’s special topics post is on the renter wage gap, which refers to the difference between younger households’ wages and the cost of living, measured across cities in California. I will also be speaking about this as part of my monthly segment for KVCR; I’ll let you all know when that’s posted so you can check it out.
Over the last 6 months, rents have been one of the major drivers of regional inflation. Rent has taken over gas prices as the big concern in the inflation reports. Housing costs compose over 40% of the typical I.E. resident’s budget, so percentage-wise, they have had an even bigger impact than gas prices.
The clearest evidence of rising rents is in the BLS CPI statistics, which capture rental price growth at a monthly rate in the Inland Empire through the “Rent of primary residence” CPI subseries.
The chart above shows that prior to the pandemic, average annual rental inflation hovered around 5%. While rental inflation declined during the pandemic, since the beginning of 2022 it has quickly recovered all the ground it had lost over the preceding year and a half.
The novelty of this LA Times article is to link these statistics up with income information and trends in migration rates. Income is important because it considers what level of rents is sustainable for younger workers who are the most sensitive to cost of living differences – i.e., the most mobile. The article finds that while the median wage in Los Angeles for younger workers is $36,649, the cost of a 1-bedroom apartment in L.A. requires a wage of about twice that amount, implying a renter wage gap of 50%. A full ranking of metro areas by size can be found here; the I.E. is 8th on that list (i.e., 8th-worst among the major metro areas).
Similar renter wage gaps exist in other big cities like San Francisco and San Diego, but the important point here is that the renter wage gap is also widening in the Inland Empire. In Riverside for example, the gap is 35%, meaning the implied cost of living for a younger worker is 50% higher than their actual earnings. Younger workers in Riverside face lower costs of living than Los Angeles, but because they also make less, so there is still a significant gap.
This chart compares rental inflation in Los Angeles to the Inland Empire, showing how rents are rising faster out here precisely because of the search for lower cost of living within the broader area.
Migration is an important part of this story because California needs workers. Many parts of Southern California already face a labor shortage, and high costs of living will further push these workers out. Research has shown that lower-income people are leaving California more than they are arriving. Combined with slower natural population growth, this trend will place a lot of strain on the labor force and the state’s economic capacity. Add to this the effects of climate change and declining homeownership rates, and many will be “pushed out” to neighboring states that offer more attractive options.