Are minimum wage workers destined to be renters? Will raising the minimum wage and tying it to inflation have any effect on the California real estate market?
She’s a jobs killer
The very concept of a minimum wage is a jobs killer, according to a widely read editorial published in Forbes magazine. According to the editorial, a $7 an hour minimum wage damages jobs creation, just as a $50 an hour minimum wage does —it’s only a matter of degree.
Let’s take a look at the popular premises waged against the minimum wage.
“About 60% of the officially poor don’t work, so the only thing raising the minimum wage does for them is to make it harder for them to get a job.”
This argument contains a classic fallacy of false cause. There is an assumption here that requiring employers to pay a higher wage would cause them to increase their minimum acceptable standard for a worker’s skills.
Minimum wages are paid for minimum skills. Requiring McDonalds to pay their burger flippers more to flip their burgers does not make it any more difficult to flip a burger!
“It is estimated that less than 15% of the total increase in wages resulting from an increase in the minimum will go to people below the poverty line and less than a third of those receiving the minimum wage are families below the poverty line.”
This one is easily refuted. The minimum wage is not designed to raise people out of poverty. It is, in fact, designed to keep people from falling into it. The minimum wage is currently not tied to inflation. Thus, those earning the minimum are actually suffering a wage decrease yearly, which is in effect a slow and steady decline into poverty, as is beautifully demonstrated in this week’s video.
“Common sense says that every dollar a minimum wage worker receives must have come out of somebody else’s pocket, either small business owners or their customers. The money for a higher minimum wage does not come from thin air.”
And here is the classic zero-sum argument. Those who make this argument claim that raising the minimum wage not only neutralizes wage increases, but the poor will have even greater difficulty making ends meet due to higher costs.
Of all the premises for keeping a thumb on low-income wages, this is perhaps the most nonsensical. Business owners do not set prices based solely on labor costs. Instead, prices are determined primarily by consumer demand. If minimum wage workers were to all of a sudden get a great raise, this would have no bearing on the rest of the population’s willingness or ability to pay a dollar more for their Big Mac.
One must keep in mind the fundamental precept of capitalism that so many minimum wage naysayers argue they are protecting: the virtue of competition. In this economy, if a business raised prices to offset labor costs, a competing business could and would refrain from doing so, thus stimulating demand for their product and forcing prices back down.
The ripple effect
Often in the debate over raising the minimum wage the interlocutors get lost on individual, idiosyncratic examples. Businessman X would likely have to raise prices. Worker Y would still live in poverty and so on. But we are really interested in the broader, macro effects of such a policy change, especially on housing markets.
Some argue that even if the federal minimum wage were raised to the President’s target of $10.10 an hour, it wouldn’t be enough to create homeowners. But this assumes that only those earning exactly the Federal minimum wage would get a raise.
The Brookings Institution found this isn’t the case. Rather, their studies show raising the minimum wage positively affects millions more workers than those currently making bottom dollar. In fact, very few workers in the U.S. earn exactly the minimum — only 2.6%. Most low-wage workers earn up to 150% of the federal minimum. These workers comprise a significant 29.4% of the labor force.
In the 32 states that use the federal minimum wage standard (including California), 3.7 million workers earned either the minimum or less in 2012. 15.2 million, however, earned within 150% of the minimum. Thus, if the minimum wage were increased, Brookings estimates 18.9 million workers would get a significant raise.
In California, 4.6 million workers — almost a quarter of the California labor force — would get a wage increase.
So will it increase homebuyer demand or not?
Giving a few dollars an hour more to our lowest income workers will not have an immediate effect on their ability (read: demand) to buy a home. Buying a home in the Golden State is no easy financial feat — as is clear by the falling California homeownership rate.
In fact, it is only becoming more difficult. During the boom, homeownership soared due to the proliferation of subprime loans. In other words, the poor bought homes on credit they were unable to pay back.
Since then we’ve gone through a monumental market correction, both the “naturally” occurring kind and the government-enforced variety. The foreclosure tsunami is all but over and distressed property sales in general have leveled out. Qualified mortgage (QM) and ability-to-repay (ATR) rules are now the gold standard for mortgage lending, ensuring another subprime crisis shan’t happen again (fingers crossed).
So now we’ve got to get to work on the bedrock of creating real, sustainable homebuyer demand — well paying jobs. We’ve seen the result of the vicious cycle of under- and unemployment on the California housing market. That cycle can work in reverse. An excellent first step to turn it around is to raise the minimum wage — a tide that will raise all boats bringing everyone a little closer to the possibility of homeownership.