The Connection between Housing Prices and Minimum Wage

The state of California has recently increased the minimum wage to $10.5 an hour and plans to keep on raising it to its final rate of $15 in 2022.

Raising minimum wage entails many problems. Those who take the hardest hit are small businesses which cannot pay so much to workers in face of increasing competition from companies across the country and worldwide.

So the question arises: Why was minimum wage has been raised?

The answer is straightforward – the mounting prices of houses in the state. It turns out that one-third of the residents in California allocate more than half of their income to housing. People are left with little money for other necessities, such as education or transportation, not to mention saving.

To illustrate the severity of the problem, let’s switch to real figures. A minimum wage worker in California currently earns $21,800 a year. Housing expenses reach $550 a month and $6,600 a year.

What we are talking about here is the minimum for a decent but extremely small house. In reality, the average rent in Pacoima, Los Angeles is $1,300 a month. In the entire city the rate climbs to over $2,200 (for the sake of comparison, the average in Las Vegas is a little less than $800).

If two adults work at a minimum wage of $10.5, they can barely afford living in the old neighborhood of Pacoima. That is on condition that they do not have kids.

Will higher wages help?

Raising the minimum wage will not be very effective and will do more harm than good as small businesses will start leaving California and go to cheaper places across the United States – which ultimately means that fewer jobs are going to be available.

What decision makers need to do is to devise a plan to lower the cost of living – especially housing prices.