Story at a glance
- A new study was published and it reveals how minimum wage increases affect people’s ability to pay rent.
- Researchers found in states that raised their minimum wage, there were 10.6 percent fewer rent defaults over three months.
- However, after the three months had passed, landlords increased their rent payments, accounting for some, but not all, of the increased income.
A pay raise can be a big relief for many Americans, making it easier to buy groceries and pay bills, like rent. Those benefits may not last very long though, as a new study found higher minimum wages hold a positive effect only until landlords raise rent prices.
Researchers decided to study rent payment data from 208 cities in 41 states from 2000 to 2009, in hopes of understanding how state-level minimum wages affected how people defaulted on their rent payments. The results found that in states that raised their minimum wage, there were 10.6 percent fewer rent defaults over three months compared to states that didn’t raise their minimum wage.
However, there was a catch — this positive effect decreased over time. Researchers found that after the three months had passed, landlords increased their rent payments, accounting for some, but not all, of the increased income.
Researchers sourced their data from the U.S. Census Bureau as well as RentBureau, a national credit history repository that tracks payments of leases.
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“Raising the minimum wage did eventually inflate rent payments, but it also came with benefits. 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,” said Brent Ambrose, one of the authors of the study from Penn State University, in a statement.
The study found on average there was a 1 percent decrease in the number of people defaulting on their leases for every 1 percent increase in the minimum wage — which corresponds to the 10.6 percent fewer monthly defaults in states that raised in the minimum wage compared to those who didn’t.
“What was most surprising to us was when we started really looking at the impact in the rental market,” said Moussa Diop, assistant professor at the University of Southern California and a co-author of the study, in a statement.
Diop explained that property owners began to slowly bump up rent roughly three months after the new minimum wage went into effect.
“When you change minimum wage, this is a shock to the system, and you expect the system to really re-adjust.”
The study found that who was affected by the wage increases and rent increases was the most important, as low-income tenants were the likeliest to be able to keep paying rent following a minimum wage hike, lowering their risk of eviction.
However, Diop said that, generally speaking, a boost to renters’ incomes is enough to cover rent hikes — but not by a wide margin. On average, researchers found rent increases took away about 55 percent of the wage increase.
“As long as any resulting increase in rents does not overwhelm the direct effect of the wage increase on lease performance, the net effect on rent default should be negative,” said the study.
The study speaks to the ongoing debate among economists, whether raising the minimum wage is beneficial or not. When delivering his first State of the Union address on Tuesday, President Biden emphasized raising the minimum wage to $15 an hour, along with extending the Child Tax Credit, so no American has to raise a family in poverty.
However, as researchers have now seen, any wage increases could be counteracted by price increases, a situation the U.S. is currently experiencing as consumer prices rose 7.5 percent annually at the end of January.
Rent prices in particular are also surging, as rent.com found nationwide rent prices increased significantly year-over-year, with one- and two-bedroom rents up 22.6 percent and 20.4 percent, respectively.
Federal minimum wage has remained at $7.25 since 2009, while state minimum wages vary widely. Some states haven’t established a separate minimum wage that goes beyond the federal requirement, while others like the District of Columbia have gone up to $15.20.
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