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Minimum Wage Impact on the Apartment Market

Hikes Have Mixed Effect on Rent Growth

By Louis Rosenthal | Tuesday, June 6, 2017

The tightest labor market in a decade has revived an age-old debate on the economic consequences of minimum wage hikes. With the federal government largely ceding its role in setting the minimum wage to lower levels of government, cities and states are now the central actors in a controversy with wide-ranging implications. Rather than looking at how the minimum wage impacts labor markets, per se, we ask: How does the minimum wage affect local apartment markets?

On one hand, an increase in low-income wages with no attendant change in employment levels could cause demand for apartments to grow, while at the same time causing rents to increase as landlords account for local renters’ increased buying power. On the other hand, if minimum-wage hikes cause employers to shed lower-paying jobs, low-wage workers will likely exit the market, putting downward pressure on apartment demand and effective and asking rents.

But if the rent decreases are not large enough to accommodate the very workers who benefit from an increase in the minimum wage, then there might be no overall improvement in apartment affordability, according to a report in Axiometrics' May 2017 Jobs Report.   

A cursory analysis of specific apartment markets affected by changes in the minimum wage will help determine if there exists prima facie evidence of distortions in housing markets as a consequence of hikes in the minimum wage — or if the interplay of larger supply and demand factors dominate. 

For example, consider the case of Sunnyvale, CA — part of the San Jose metro area — which, on the way toward a $15 minimum wage, initiated the first major hike in January 2015, from $9 to $10.30 per hour.


The unemployment rate in Sunnyvale trended downward after the January 2015 minimum wage hike. However, the downward trend in unemployment began well before the minimum wage increase became law. It isn’t clear that employment levels were impacted by changes in the minimum wage — especially considering that changes in the unemployment rate were similar in Sunnyvale, its larger metro area, and the state as a whole.

Rent growth in Sunnyvale began a sharp decline after the first significant minimum wage hike was implemented, according to Axiometrics' apartment market research. While it’s tempting to assume that the increasing minimum wage caused rental growth rates to decline, the situation is complicated by well-above-average new supply levels in the year before the higher minimum wage was adopted. Three times the annual average new supply levels were added in 2014 alone — enough to dent the incredible rent increases that re-ignited in 2013. In other words, after taking into account the supply and demand fundamentals, there is no clear-cut evidence of an impact on rents.

Within the same metro area, Mountain View, CA raised the minimum wage in January 2016 from $10.30 to $11 per hour.

Mountain View Indicators

As in the case of Sunnyvale, there is little indication of a change in the trajectory of unemployment in Mountain View. The series follows a similar trend as the larger metro area (composed of municipalities with different minimum wage requirements), and the state as a whole. Likewise, the rental growth rate continued its downward slide from the early 2015 peak, apartment research found. This is just what we would expect, given the nearly 300% increase in new supply in 2015 compared to Mountain View’s long-term average.

Economists have also looked at Seattle’s minimum wage experiment, which is an interesting case study given the city’s outstanding job growth and apartment construction activity. A report by the University of Washington found that after increasing the minimum wage to $11, low-wage workers in Seattle gained an additional $13 a week in wages (after accounting for other relevant factors). Using (generous) back-of-the-envelope calculations, a low-wage worker in Seattle might find their annual earnings increase by about $700.

However, in the year after the new minimum wage standard went into effect, the average rent for Class C apartments (which more likely cater to lower-wage workers) increased by about $1,300 a year. In other words, the most generous assumptions of low-wage workers’ earnings are not enough to keep pace with rent growth in Seattle.  

What does this tell us about the impact of minimum wage increases on the apartment market? In the two California case studies considered, rental growth rates certainly moderated after minimum wage increases went into effect. In fact, rents in both Sunnyvale and Mountain View actually declined beginning in late 2016, according to apartment market research.

On one hand, this might support the argument that minimum wage increases put downward pressure on apartment rents. But as Seattle demonstrates, the very workers who stand to benefit from minimum wage increases still do not earn enough in a year to afford the average Class C apartment. At the same time, the unique supply and demand fundamentals in the San Jose and Seattle metro areas appear to better explain changes in apartment rents than exogenous municipal-level policy decisions.

Careful attention to policymaking at the city and state levels is an important component of an overall strategy. But as this cursory analysis demonstrates, in terms of impacts on the apartment market, larger market forces likely swamp changes in the earnings of low-wage workers.     

Louis Rosenthal

Louis Rosenthal

Real Estate Analyst

Louis Rosenthal researches and analyzes current apartment trends in the United States and correlates them with economic indicators. He also studies the urban landscape and other metrics to develop in-depth reports and presentations for clients. Louis recently earned his Master of Science in Public Policy, focusing on housing, landuse patterns, real-estate dynamics and economic development. He combines that knowledge with his four years of practical experience in tax analysis, regression analysis and presentations to develop insightful analysis. An accomplished writer, Louis’ work has appeared on and Axiometrics’ blogs, among others.

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