Should Cities Link the Minimum Wage to Housing Costs?

The cost of living is substantially higher today than it was five years ago, with double-digit increases in the price of basic needs like food, health care, housing and utilities since 2020. For most people, housing is the biggest expense. Around the country, housing costs are at all-time highs. An average homeowner pays 21.4 percent of their income toward housing while a typical renter pays almost 31 percent, according to the most recent U.S. Census estimates.

Starting next year, Santa Fe will become the first U.S. city to explicitly link the high cost of housing to the minimum wage.

Since 2005, Santa Fe has had a living wage ordinance that ties the wage rate to the Consumer Price Index, the standard measure of inflation based on the cost of a typical basket of goods and services. The current minimum wage in the city is $15 per hour. Starting in 2027, it will rise to $17.50 per hour. After that it will be adjusted annually based on a blend of CPI and the Department of Housing and Urban Development fair market rent for a two-bedroom unit in the area. If CPI rises by 2 percent and rent rises by 3 percent, for instance, the minimum wage would rise by 2.5 percent. The increase is capped at 5 percent per year. The update to the city’s Living Wage Ordinance was initiated by the city administration under the previous mayor, Alan Webber, who left office at the end of last year.

“We were exploring ways to support our residents who are struggling with not only inflation and typical cost measures, but understanding that one of our biggest challenges is housing,” says Johanna Nelson, director of Santa Fe’s Office of Economic Development, who worked on the proposal. “The need motivated the formula.”

It’s estimated that only 8,000 to 9,000 Santa Fe residents will get a raise directly because of this ordinance, says Nelson. But it’s a signal that Santa Fe cares about supporting its most vulnerable workers. “My hope is that this gives a bit of breathing for them so they can focus on making investments elsewhere,” Nelson says. “This isn’t life-changing money. But can we create a bit more space and capacity so they can get ahead?”

The federal minimum wage of $7.25 per hour hasn’t been raised since 2009. Among states with higher minimum wages than the federal rate, it’s increasingly common to link the wage rate to inflation. Nineteen states plus Washington, D.C., have adopted laws linking the minimum wage to CPI, with current minimums in those states ranging from $10.85 per hour in Montana to $17.95 per hour in the district, according to the Economic Policy Institute (EPI). Many cities, especially those in high-cost parts of Washington and California, have higher minimum wages linked to inflation as well.

Giving localities the ability to set their own minimum wage rates above the state and federal levels allows officials to respond to local conditions, says David Cooper, director of the Economic Analysis and Research Network at EPI. When cities and state officials tie their minimum wage to inflation, a practice known as indexing, they also save themselves from having to vote on the issue repeatedly.

“It’s automatic,” Cooper says. “No one needs to take votes on whether this is going to happen, it’s just on autopilot. And it works well for the business community, too, because they can very easily anticipate what their new wage bill is going to be year to year rather than having to budget for some large increase five years later when lawmakers get around to enacting a raise.”

Santa Fe is the only jurisdiction, as far as Cooper knows, to have adopted a policy linking the minimum wage directly to area housing costs. The cost of housing is already included in the general calculation of CPI, Cooper says. But given the housing crisis gripping many parts of the country, it makes sense that officials would want to link wages and housing costs. Most public efforts to help people afford housing focus on subsidizing or reducing the cost of housing itself, rather than on raising people’s incomes.

“It’s great that policymakers [in Santa Fe] are trying to find ways to address the so-called affordability crisis that recognize that affordability is a function of both how much things cost and how much people are being paid,” Cooper says.

Housing costs are a primary driver of affordability challenges in Santa Fe. The city is one of the biggest markets for luxury second homes in the U.S., according to an impact study of the new living wage ordinance completed by Reilly White, a finance professor and associate dean at the University of New Mexico who has worked with the city for the last several years. The “affordability gap” for housing in Santa Fe, measured by the difference between median incomes and median home prices, is nearly twice the national average.

“Literally 80 percent of households cannot buy a median home or anywhere near a median home in Santa Fe,” White says. “It’s a huge issue.”

Real estate prices have also been more volatile than other goods historically, White says. During the discussion with the city about the living wage proposal, he provided analysis of five different scenarios for linking the wage to inflation. In the case of a CPI-only index, the minimum wage could increase to around $22 per hour by 2034, a rate that “offers stability but fails to address rent pressures,” according to the analysis. With an index based only on housing costs, by 2034 the wage was projected to be as high as $38.37 per hour or, in the event of a crash in real estate values, as low as $12.97. The city settled on a course that takes both CPI and housing into account, with a floor of $17.50 per hour and a 5 percent annual cap on minimum-wage increases.

Some City Council members voiced concerns about the proposal, saying it would hurt local businesses or, conversely, contending it wasn’t enough of an increase to justify calling it a “living wage.” The measure eventually was adopted by a vote of 5-2. Some small businesses, which make up most of Sante Fe’s economy, had concerns about the legislation, but ultimately didn’t organize a major campaign of opposition.

“We’re trying to thread the needle, if you will, between what really works for our workforce so they can continue to live in Santa Fe and also make it predictable, manageable, and economically viable [for businesses],” says Alan Webber, the former mayor who left office at the end of last year.

The living wage update was one component of a broader strategy to help Santa Fe’s low-income workers afford basic needs like housing, Webber says. Another is a 3 percent excise tax on home sales over $1 million, with proceeds going to the city’s Affordable Housing Trust Fund. Webber says the excise tax and the living wage update were intended as “bookend” measures that address both the cost of housing supply and residents’ ability to pay rent.

“My hope is that we’ll see the combination of strategic components all add up to a stabilizing factor for keeping Santa Fe’s population diverse,” he says.