Higher minimum wage may reduce rent defaults but raise rent payments

UNIVERSITY PARK, Pa. – While there is a debate among economists about the benefits of increasing the minimum wage, a new study found that a higher minimum wage was associated with fewer people defaulting on their rent payments – until landlords responded by raising rent.

The study – recently published in the Journal of Urban Economics – was one of the first to examine how changing the minimum wage impacts people's ability to pay for shelter, which is arguably an essential expense.

In an analysis using rent payment data in the U.S., the researchers 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, this positive effect decreased over time. After three months had passed, landlords increased their rent payments – accounting for some, but not all, of the increased income.

“Raising the minimum wage did eventually inflate rent payments, but it also came with benefits,” said Brent Ambrose, Jason and Julie Borrelli Faculty Chair in Real Estate at Penn State. “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.”

According to the researchers, there is currently a debate among economists about whether raising the minimum wage is beneficial or not.

Ambrose explained that labor is similar to any good that has supply and demand. If there is a consistent supply of workers but the demand goes up, then the price of labor – wages – will go up, too. But if the cost of labor increases and companies have to pay more for labor, it is possible companies will reduce the amount of labor they need.

“Raising the minimum wage will help the people who are getting higher wages, but it may come at a cost to society in terms of lost jobs,” Ambrose said. “It could also come at the cost to the individual if companies reduce the number of hours they’re offering their employees because they have to pay more for those hours and they're not able to pass that cost on to consumers.”

But, the researchers said, raising the minimum wage also has the opportunity to help people afford critical 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 throughout the same time period. They were then able to compare the number of renters who defaulted on their rent payments to whether there had been recent increases in minimum wage.

Ambrose said the results support both sides of the debate around minimum wage, and that the findings demonstrated how markets react to and influence prices – including wages and rent.

“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 it would be,” Ambrose said. “After rents went up in response to the increase in income, people still had some additional income compared to before. But it wasn’t as big of a surplus as people would like to think raising the minimum wage leads to.”

Sumit Agarwal, National University of Singapore, and Moussa Diop, Penn State Ph.D. alumn now at the University of Southern California, also participated in this work.

The Penn State Institute for Real Estate Studies helped support this research.