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August 06, 2015

Does raising the minimum wage lead to higher rents?

Economists debate whether higher wages always benefit workers

Ever since Los Angeles, San Francisco and Seattle adopted laws requiring a minimum wage of $15 per hour, plenty of pundits have argued over whether this will benefit low-income workers or cause them to lose their jobs. Now some economists are asking a new question: how could increasing the minimum wage affect housing prices?

The answer depends on the simple economic concept of supply and demand. If the housing supply stays the same, but demand increases because workers are getting paid more, then in theory prices should go up.

"What you're essentially doing is increasing the buy power without increasing the supply, which will just drive up the prices," said UCLA researcher Rosalie Ray to Southern California Public Radio.

But Berkeley professor Michael Reich told that there should be time for supply to increase before increased demand kicks in.

"Cities that are enacting minimum wage increases to $15 are doing so over five to six years. That's enough time to expect some responses from housing supply," he said.

Reich also pointed out that there isn’t any hard data to use as evidence that minimum wage increases seriously hurt the rental market.

Even if a minimum wage increase causes the prices of different kinds of goods to go up, they may not go up by much. In a 2004 analysis of 20 different studies on the minimum wage, researchers concluded that "most studies found that a 10 percent US minimum wage increase raises food prices by no more than 4 percent and overall prices by no more than 0.4 percent."

The relationship between wages and rent is important, because housing costs are the biggest pressure on low-wage workers, especially in high-cost areas like New York.

For example, a report from the National Low Income Housing Coalition showed that a minimum wage worker in New York State cannot afford a fair-market, one-bedroom apartment for less than 30 percent of their income – unless they work 98 hours per week.

In July, Governor Andrew Cuomo of announced plans to raise the minimum wage for fast food workers in New York State to $15.

But Jordan Weissmann of Slate called proposals calling for a federal minimum wage of $15 minimum wage “a terrible idea,” precisely because of housing pressures. 

In big cities, "high costs of living are driven overwhelmingly by affordable housing shortages," he pointed out.

For example, rent in New York City is 57 percent higher than the national average. Rent in San Francisco is 81 percent higher than the national average.

"So long as the real estate market remains constrained, it's easy to imagine pay hikes getting absorbed into rent increases, as landlords realize that the whole metro area just got a raise," Weissman wrote.

At least there’s no debate about whether landlords will benefit.