Professor Daniel MacDonald is the chair of Cal State San Bernardino's Economics department and the author of the weeklyInland Empire Economic Updateemail newsletter. You can subscribe to his newsletter here. Below is a transcript of the conversation between Professor MacDonald and KVCR's Jonathan Linden.
Jonathan Linden: To get started here, Daniel, can you tell listeners what your economic indicator is for the month of September?
Daniel MacDonald: Sure, Jonathan, thanks for having me. My indicator for this month is the renter wage gap. The renter wage gap measures the difference between what younger workers actually make and what they need to make in order to sustainably afford a one-bedroom apartment where they live. Now, I realize the operative word here is sustainably, so let me give you an example. In the Los Angeles metro area, median rents are above $2500 per month. Most people would say it's reasonable for workers to not spend more than 40% to 50% of their monthly income on rent. And even this number is conservative; I'm sure many would put the percentage much lower. But in order for that to be true, the median income of a renter in Los Angeles must be very high, between $5,000 and $6,000, after taxes. But many younger workers simply do not make that kind of money. A study calculated the renter wage gap in Los Angeles to be 50%. Meaning workers actually make about half of what they should be making in order to live reasonably in that area. Los Angeles ranks number one on this list, not a list you want to be number one on.
Jonathan Linden: And what do those stats look like here in the Inland Empire?
Daniel MacDonald: Well, the renter wage gap in the Inland Empire is 35%. So that's a little lower than the 50% in Los Angeles, but it still ranks eighth worst among major metro areas. Further, we know that rents are rising in the Inland Empire. Many workers are searching for cheaper markets, and the catch-22 about this is that those cheaper markets become more expensive because of the higher demand on the existing stock of rental housing. Basically, precisely because the IE has cheaper housing than LA, this leads IE rents to rise at a higher rate than LA, reducing affordability. Over the last year, the increase in rental prices in the Inland Empire has been higher than in Los Angeles. Rents have increased about 5% in LA, but they have risen over 8% in the Inland Empire as people flee Los Angeles to seek out cheaper options.
Jonathan Linden: And why this specific focus on the millennial population?
Daniel MacDonald: Well, I think the focus on younger workers makes sense. Younger workers are more likely to rent in the first place. So, if you're going to make a renter wage gap, it makes sense to focus on those younger workers. And as we know, younger workers are spending longer in the rental market before buying their first home. But the harder it is to save for that down payment on a home, the harder it is for them to get out of the rental market in the first place.
Jonathan Linden: And with this renter wage gap, what would the long-term effects of this look like?
Daniel MacDonald: Well, Jonathan, Southern California residents are finding it increasingly economical to leave the state for cheaper housing elsewhere. Recent studies have, in fact, found more workers are leaving California than coming in. And this is particularly true of low and middle-income workers. Combined with a slower overall natural population increase, this means fewer workers in California, and it doesn't take any economist to realize that, well, fewer workers means we can't produce as much, and the economy will ultimately suffer as a result.
Jonathan Linden: And does inflation tie into this at all?
Daniel MacDonald: Sure. In fact, if you compare inflation in housing to inflation in gas prices, the fact that housing accounts for 40% of the typical consumer's budget means that any increases in housing are going to impact people more, in fact, than increases in gas prices. Over the last few months, gas prices have also been declining. So that means that the increases in rents that we're seeing are an even bigger part of this picture and are certainly an important component driving inflation.
Jonathan Linden: Alright, well, Cal State San Bernardino Economics Professor Daniel McDonald, thank you for taking some time to join me.
Daniel MacDonald: Thanks again. Have a great day.
