Minnesota’s Economic News — W/E 12/8/23
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The effects of minimum wage hikes on the workforce are well documented. According to research evidence, minimum wage hikes lead to job losses and may also cause employers to reduce hours, offer fewer fringe benefits, or automate. Moreover, the costs associated with minimum wage hikes can be passed on to consumers through high prices.
What is less studied is how minimum wage hikes affect other aspects of the economy. A recently published study from researchers at Penn State University offers new evidence on how minimum wage hikes affect the cost of housing.
More specifically, the researchers analyze whether minimum wage hikes have any effect on eviction risk, whether negative — job losses lead to defaults on rent — or positive — higher incomes lead to less default on rent payments.
And according to the authors, in the beginning, raising the minimum wage reduces the risk of renters defaulting. However, in the long term, landlords raise rents, which eats away at that benefit.
Researchers scoured data on rent payments in 208 cities in 41 U.S. states from 2000 to 2009, including the number of renters who defaulted on payments. As it turned out, the data dovetailed with state-level minimum wage law amendments during that time. States that upped their minimum wage saw 10.6% fewer rent defaults in the following three months compared to those whose starting pay stayed static.
But while that’s statistically significant, it also didn’t last. The boost in rent payments flattened over time, and substantially so by the end of three months. Penn State’s team attributes this to its second major conclusion: that landlords raised their rent prices in response to the wage hikes.
There are a couple of mechanisms through which minimum wage hikes can affect rental prices. For one, rising incomes among renters could raise the demand for housing. This then incentivizes landlords to raise rents. Secondly, minimum wage hikes can increase the operating costs for landlords as well as other businesses in the surrounding vicinities, leading to rising rents.
In this paper, the authors claim that the increase in rent is mainly through the first mechanism. As renters get more income, their demand or consumption choices — including that of housing — changes. This allows landlords to capitalize on the trend and raise rents.
The authors do note, however, that even though rising rents ate away some of these wage hikes, workers still benefited, albeit at a smaller magnitude.
There was still a net positive, says Brent Ambrose, a faculty chair in real estate at Penn State and a lead author of the study. “After rents went up in response to the increase in income, people still had some additional income compared to before,” he said. However, “it wasn’t as big of a surplus as people would like to think raising the minimum wage leads to.” Despite the accompanying rent inflation, Ambrose also claimed the benefits were notable: “The increased income helped stabilize people’s ability to pay their rent, particularly for people at the lower end of the housing expense market, where we saw the biggest effect.”
On some level, it is easy to look at this as evidence that a minimum wage hike is a good policy. It increases income for some low-income workers despite the increased costs, as seen in this paper.
However, these benefits have to be compared against the costs that other workers incur when they lose their jobs or have their work hours reduced when the minimum wage goes up.
As a CBO study published in 2021 showed, not everyone loses from a minimum wage hike. Some people do indeed see their incomes rise, and are thereby better off. But another group of people lose their jobs or see their work hours decline. And these people may be pushed further into poverty.
To the extent that there are indeed benefits to minimum wage, they are minimal. This is also shown in this paper when the authors account for some of the far-reaching changes in the economy that might dilute those benefits — like increases in rent prices, for example.
And whether the minimum wage is good or bad depends on whether these minimal benefits exceed the costs from job losses or reduction in work hours. The authors assume that there are no job losses or reductions in hours for any rent-paying workers. From prior evidence, we know that that is an unrealistic assumption. The majority of evidence shows that minimum wage hikes usually lead to increased unemployment, especially for low-skilled and young workers. The magnitude of that effect certainly varies depending on market factors as well as the size of the increase.
It is highly likely that the benefits the authors mention would diminish or even turn negative if these employment effects were considered.
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