Will Raising the Minimum Wage Raise Rents Too?

In some of the country’s most expensive cities to live, economists worry increased incomes will put even more pressure on housing markets.
by | August 2015
(Flickr/Thomas Hawk)

Whenever a minimum-wage increase is proposed, you can count on hearing certain warnings, including that employers will cut back on hiring, or that prices could go up for consumers. Now that cities have gotten in the habit of setting their own minimums, a new concern has come up: the possible effect on housing prices.

The cities that have adopted a $15-per-hour minimum wage -- Los Angeles, San Francisco and Seattle -- are already some of the country’s most expensive places to live. Some economists are concerned that increased incomes will put still more pressure on housing markets in these areas. It’s simple supply and demand, says Chris Thornberg, founding partner of Beacon Economics in Los Angeles. If people have more to spend in the low-end rental market and there isn’t new construction, prices are bound to rise, he says -- eating up much of the benefit of increased wages, “particularly with a big-ticket item like housing.”

This became part of the debate before Los Angeles approved its increase in May. The idea might make sense on paper, says Michael Reich, director of the Institute for Research on Labor and Employment at the University of California, Berkeley, but there’s no data showing minimum-wage levels have any effect on housing. “Cities that are enacting minimum-wage increases to $15 are doing so over five to six years,” Reich says. “That’s enough time to expect some responses from housing supply.”

It’s not yet clear how the working poor will respond to their raises -- whether a family now renting a single room in a crowded house, say, will decide to find more space somewhere else, thus creating more demand. The poor will certainly be helped by having more choices, says Joel John Roberts, CEO of People Assisting the Homeless in L.A. “Now, when we help people find jobs who are homeless, they typically get minimum-wage jobs, which doesn’t pay market-rate rent.” Arguing that their wages shouldn’t go up is like saying the economy should never grow because that would increase rents, he argues.

This unsettled question about housing costs reflects a new reality about the minimum wage. Having cities mandate wages that are substantially higher than state or federal levels could have effects that are not yet understood. “The more localized these increases are, the more spillovers there can be into other markets,” says Michael Strain, an economist at the American Enterprise Institute.