Raising California’s minimum wage won’t help workers much

Competition for limited housing stock will prompt low-income workers to allocate any pay raises to securing better housing, enriching landlords.

potter-minimum-wageAdvocates for raising the minimum wage aspire to help. Many working-class Americans barely subsist earning minimum wage — and some only survive living in appalling conditions. Advocates of raising the minimum wage believe forcing employers to pay more will put more spending money in the pockets of low-wage workers and improve their quality of life.

Many advocates for eliminating the minimum wage are industry shills paid to peddle lies so employers can exploit workers without paying them a livable wage. However, many advocates for freezing the minimum wage or eliminating it completely also believe they help lower-income Americans. They argue that a higher minimum wage discourages employment, and more workers at lower wages is better than higher wages and higher unemployment.

So who is right? Sorry, I don’t have that answer, but as long as the minimum wage is not livable, I would probably side with the advocates for raising it. When employers don’t provide a livable wage, the workers end up on government assistance, then we end up paying their bills. As a taxpayer, I don’t like subsidizing Wal-Mart or Burger King, which is what happens now.

What’s not often discussed when considering the minimum wage is where the money goes once minimum-wage workers get paid more. In most areas of the country, these workers will spend the money on goods and services, boost the economy, and raise their quality of life. The argument over minimum wage is largely a debate about who wins and who loses. Either management and capital gain, or workers do. It’s a zero-sum game.

Of course, there is no free lunch, and even when workers earning the minimum get a raise, the people who don’t benefit are employers who must pay the higher wages and the just-above-minimum-wage workers who don’t get a raise. Raising the minimum wage is inflationary by nature.

Those workers who don’t get raises while everyone around them does endure a lower quality of life because they face higher prices on good and services as they compete with the wage earners who got a boost. In other words, If a minimum wage earner goes from $10 to $15, the worker making $16 per hour who doesn’t get a raise falls behind, the loser in a Red Queen Race.

In labor markets where housing availability is limited, things are a little different. Los Angeles is about to raise its minimum wage, but this won’t be a boon to workers. Higher minimum wages in markets where housing supply is constrained will mostly go toward paying higher rent, a huge bonus to local landlords.

When housing is limited, renters compete fiercely for available supply. If you suddenly put $200 more in someone’s monthly paycheck, someone who lives in a substandard crap-hole, will put most of this money toward rent on what they hope is a nicer place. Of course, the cumulative effect is a wash as most renters end up in another kind of Red Queen Racepaying more just to stay in the place they already have because of the people below them also trying to move up.

In the end, most of the extra money provided to a minimum wage worker in a supply-constrained housing market will end up in the hands of their landlord.

Does that mean we shouldn’t raise the minimum wage? No. But raising the minimum wage without removing the barriers to providing more housing supply won’t accomplish what advocates hope it will.

California’s minimum wage isn’t the problem. The cost of housing is

Kerry Cavanaugh, January 5, 2017

California’s new minimum wage increase is pushing some businesses out of the state, at least according to one clothing manufacturer, who plans to move his operation to Las Vegas. The state’s base pay increased to $10.50 on Jan. 1. It’s the first in a series of hikes that will eventually set the minimum wage at $15 an hour in 2022.

If California drives low-wage industries out of the state, is that a problem? Most textile industries already left the US for cheap labor overseas. In all likelihood, the people who lose their jobs will find other work, or they will leave the state too. California creates many jobs but builds few houses, which is the real problem.

… there’s an equaling compelling reason why California had to raise the minimum wage: It’s nearly impossible to live on so little income given the incredibly high cost of housing. A new report from the state’s Housing and Community Development Department says that 1 in 3 Californians pays more than half his income for housing, with less to spend on transportation, education, healthcare or to put into savings. The burden of high housing costs falls especially hard on the lowest-paid workers.

Here’s the math for the minimum-wage worker of today: $10.50 an hour for full-time employees equals $21,840 a year. That’s low enough to qualify for a government-subsidized apartment, but good luck finding one because there are long waiting lists for affordable units.

A worker earning $10.50 an hour should pay about $550 a month on housing. That figure is based on the U.S. Housing and Urban Development Department affordability guideline that a person should spend no more than one-third of his income on housing. But the average rent in Pacoima is $1,300 a month, according to RentJungle, which is far below the city of Los Angeles’ average of $2,300. (Average rent for a one-bedroom apartment in Las Vegas is about $780 – still too much for a worker earning $10.50 to afford his own apartment.)

One of the houses I manage in Las Vegas is rented to two casino maids making minimum wage. Between the two of them, they split a $950 rent, which is affordable on minimum wage pay. Two minimum wage workers can afford a detached single-family home in Las Vegas. In Los Angeles, probably not.

Two adults working full time and earning $10.50 an hour get a bit closer to affording the average rent in Pacoima, but if they have children and need to pay for child care, that’s another $700 a month. It just doesn’t pencil out without government assistance.

The situation won’t improve much even when the minimum wage hits $15 in 2022 (or 2023, if employed by a company with 25 or fewer workers). The worker would be able to pay $780 a month in rent, which is still way less than the average rent today. Because housing construction in California hasn’t kept up with demand, rents in L.A. are expected to keep rising through 2022.

In fact, raising the minimum wage will be one of the causes of rising rents through 2022 as I outlined above.

California lawmakers were right to raise the minimum wage in an attempt to better match pay to the state’s high cost of living. But their work isn’t complete. State leaders, along with lawmakers in cities and counties, have to address housing affordability. That means making it easier to build more market-rate apartments and houses, as well as more subsidized homes for the lowest-income residents.

Salem argues that California needs more stable, blue-collar jobs, and that’s true. But the reality is that $10.50 an hour is a poverty wage. Even $15 an hour won’t help much in Los Angeles as long as the cost of housing remains so high.

The bigger problem here is clearly the lack of housing supply. All the measures proposed to combat the problem amount to treating the symptoms without curing the disease.

For example, affordable housing mandates is a direct attempt to treat the symptom of high prices. If we allowed more supply to come to market, affordability mandates would be unnecessary because housing would be affordable just like it is in Las Vegas. California elitists will spout nonsense about California being much more desirable, but the simple truth is that California doesn’t build enough houses to accommodate its job growth.

Raising the minimum wage is just another band aid. The cost of living is so high because people must compete for housing and bid up prices to ridiculous levels. The middle class ends up substituting down to lower quality properties. The lower middle-class does the same, but they increasingly double up to pay the bills or leave the state. The lower classes play the subsidy lottery, and the losers end up homeless or leave the state.

We could solve several of California’s nagging social problems if we tackled the root problem of a lack of housing. Unfortunately, the nimbys rule the day, and despite the growing frustration, nobody can find the political will to mandate more housing be built. Until that happens, the problem will not be cured with band aids.