A higher minimum wage can reduce rent defaults
UNIVERSITY PARK, Pennsylvania — Although there is debate among economists about the benefits of raising the minimum wage, a new study has found that a higher minimum wage is associated with fewer people defaulting on their rent – until landlords react by raising the rent.
The study – recently published in the Urban Economics Journal – was one of the first to look at the impact of changing the minimum wage on people’s ability to pay for housing, which is arguably an essential expense.
In an analysis using data on rent payments in the United States, researchers found that in states that raised their minimum wages, there were 10.6% fewer three-month rent defaults compared to to states that had not increased their minimum wage.
However, this positive effect diminished over time. After three months, landlords increased their rents, which accounts for some, but not all, of the increase in income.
“The minimum wage increase ended up inflating rents, but it also came with benefits,” said Brent Ambrose, Jason and Julie Borrelli Faculty Chair in Real Estate at Penn State. “Increased incomes helped stabilize people’s ability to pay rent, especially for people at the lower end of the housing expense market, where we saw the greatest effect.”
According to the researchers, there is currently a debate among economists about whether raising the minimum wage is beneficial or not.
Ambrose explained that work is similar to any good that has supply and demand. If there is a constant supply of workers but the demand is increasing, then the price of labor – wages – will also increase. But if the cost of labor rises and businesses have to pay more for labor, it is possible that businesses will reduce the amount of labor they need.
“Raising the minimum wage will help people who earn higher wages, but it may come at a cost to society in terms of lost jobs,” Ambrose said. “It could also be to the detriment of the individual if companies reduce the number of hours they offer their employees because they have to pay more for those hours and they are not able to pass this on. cost on consumers.
But, according to the researchers, raising the minimum wage also has the potential to help people meet essential expenses like housing.
For the study, the researchers analyzed data on rent payments from 208 cities in 41 U.S. states from 2000 to 2009. They also noted changes in state-level minimum wage laws in those states over the of the same period. They were then able to compare the number of tenants who had not paid their rent and whether there had been any recent increases in the minimum wage.
Ambrose said the findings support both sides of the minimum wage debate, and the findings demonstrate how markets respond to and influence prices — including wages and rents.
“We were able to establish that raising the minimum wage had a benefit, but it wasn’t as big as people would like to hope,” Ambrose said. “After rents went up in response to rising incomes, people still had extra income than before. But it was not as large a surplus as people would have you believe by raising the minimum wage. »
Sumit Agarwal, National University of Singapore, and Moussa Diop, Ph.D. of Penn State. a former student now at the University of Southern California, was also involved in this work.
The Penn State Institute for Real Estate Studies helped support this research.
Urban Economics Journal
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