How Will Raising Minimum Wages Affect Rentals?
Join 1000's of Authors at StreetArticles Today!

How Will Raising Minimum Wages Affect Rentals?

Palos Verdes, CA. With many states increasing the minimum wage, a demand for labor plays an important part to real estate investors. Why is this so important for these investors?

Consider the following scenarios: Let us assume that the labor share and the profit margins remain constant at current levels of around 44% and 10% respectively, labor productivity growth continues to be weak at 0.5% and policymakers manage to push wage growth to levels of around 4%. The sum of the labor share of output and inflation has to grow at 3.5% per year.

Now we have reached the crux of the matter for real estate investors. Given that the labor share of output remains nearly unchanged, this implies that inflation rate would have to rise to 3.5%, drastically reducing returns, given that current inflation expectations for the next five years are barely over 1%. Such an outcome would be harmful to the economy and, hence lowering the outlook for the real estate market.

Secondly, higher wage costs given a maximum inflation rate of 2% and steady labor productivity growth of around 0.5% would lead to a much higher contribution of labor to output, and thus to lower profit margins. In such a scenario, the labor share of output would need to grow by 1.5% yearly, and as evidence shows profit margins would be compressed by nearly 1.3% per annum from their present level of 10%.

Currently levels do not suggest that real estate investors are prepared for profit margins to halve over the next three to four years.

The hypothetical scenario of nominal wage growth accelerating to pre-crisis levels with productivity growth still stuck at current levels is just one potential outcome analyzed here to highlight the debilitating effects for real estate investors.

The actual outturn might deviate from this scenario on a number of parameters. Productivity growth could start to rise again based on the reasoning described above, or wages might fail to rise to pre-crisis levels. Alternatively, the burden of labor’s rising share of output might be spread among various real estate investments. However, and investors should bear this in mind when forming their assessment of possible future outcomes, someone has to foot the bill for the cost of lower productivity growth.

Increasing the minimum wage would have two principal effects on low-wage workers. Most of them would receive higher pay that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold. However, some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly affecting low-income rentals.

Rather than pursuing policies such as minimum wage increases that create winners and losers, policymakers should focus on policies that generate faster economic growth to benefit all workers. While minimum wages may be a well-meaning attempt to help workers, economic research clearly shows that somebody must pay the price for any increase, and it is usually the least skilled and least fortunate among us.

ABOUT THE AUTHOR: Eugene E. Vollucci is the Director of The Center for Real Estate Studies, a real estate research organization. He is author of four best selling books and many articles on rental income investing, real estate in general and taxation. To learn more about the Center for Real Estate Studies and its educational resources.


Street Talk

No comments present
You May Also Like
Custom Home Builders In Burlington NC - Building Your Dream Home
Do you have a lot in Burlington NC? It’s time to build your dream home. Don’t settle for pre-fab homes that will actually cost you more in the long run. When you hire custom home builders, every part of your house can be personalized depending on your preferences and needs.…
By: Aaron Garner in  Real Estate  >  Building a Home   Jun 07, 2016  
0
  Likes: 0

Find Premium Quality Home Builders In Fayetteville NC
Planning on getting your very first home? Are you planning to move to a new home in Fayetteville NC? Contact a home builder today. You can find many home builders in Fayetteville, but not all of them will be able to offer high-quality service. Here are some ways to search…
By: Aaron Garner in  Real Estate  >  Building a Home   Jun 07, 2016  
0
  Likes: 0

Find the Best Realtor By These 4 Easy Steps
It is very hard in the current world to find the best property deal for a general man without hiring any help from the real estate agents. This is actually a true fact because we don’t have enough time to investing finding the best property deal that will benefit our…
By: Smith Davidson in  Real Estate  >  Selling   Jun 07, 2016  
0
  Likes: 0

Things to Consider When Choosing Custom Home Builders In Pinehurst NC
You can find many home builders in Pinehurst NC, but not all of them can truly give you your dream home. Before you go looking for a custom home builder, you should have a plot of land and financing in place. There are some home builders that can introduce you…
By: Aaron Garner in  Real Estate  >  Building a Home   Jun 07, 2016  
0
  Likes: 0

Apartments for Sale In Bengaluru Has Attracted More Investors
Every state in India has its own essence which together offers a wonderful and exquisite experience. If you travel to different regions, then you can notice the varying lifestyle of the people. Over the years, the level of development has changed the real estate in India. The urban areas are…
By: Nikita Seth in  Real Estate  >  Selling   Jun 07, 2016  
0
  Likes: 1

Need Cash For My House Now In Florida
Is “I need cash for my home in Florida” a familiar refrain? If so, then you shouldn’t waste another moment. If the subject of sell my home in Florida now appeals to you, then why not do something about that? Through our company, if you find yourself saying things along…
By: allinone1 in  Real Estate  >  Property Management   Jun 06, 2016  
0
  Likes: 0

8 Reasons Why Families Should Choose Condo Over Traditional House And Lot Living
Settling in massive houses has been the norm for families in multiple countries. However, through the years, these houses have become bigger and families began having fewer children. Parents started working longer hours while their kids stayed in their room and occupied themselves with gadgets. Due to this arrangement, families…
By: oliviacoore in  Real Estate  >  Buying   Jun 06, 2016  
0
  Likes: 0

Upvc Fascias Peterborough, Find Professionals Online
The roofline is very important because it protects your house from all the water from the rain that could lead to the decay of the property. There are high quality uPVC fascias Peterborough that you can purchase for fair prices. You can find experts who deal with guttering Peterborough, who…
By: Johny Danes in  Real Estate  >  Building a Home   Jun 03, 2016  
0
  Likes: 0

Benefits Of Upvc Fascias Peterborough
Each roofing element plays a vital role in protecting your home or business. This prevents water from getting inside the house and to the actual roof and walls, thus avoiding decay and rot. It comes a time when old roofing systems are not effective anymore or they present problems and…
By: Johny Danes in  Real Estate  >  Building a Home   Jun 03, 2016  
0
  Likes: 0

Various Ways In Which You Can Be Cheated While Dealing In Real Estate
Buying a real estate is a dream for most when it comes to residential buying and most of those people don’t have any sort of experience in Property buying. Not all, but still it has happened that sellers try to cheat buyers with fraud documents, fake registry, and many other…
By: Robbert Cobbs in  Real Estate  >  Property Management   Jun 04, 2016  
0
  Likes: 0

Why Install New Guttering Peterborough
Roofline elements were once designed and manufactured from wood and although wood does look nice and has its appeal, it gets damaged easily and it needs replacement until the entire roof suffers. Just think of the fact that wood rots and when exposed to humidity it gets completely damaged. In…
By: Johny Danes in  Real Estate  >  Building a Home   Jun 03, 2016  
0
  Likes: 0

Choose the Best Elderly Care Home Cheshire Located
If you still struggle to find a good retirement location for one of the members of your family, then it would be the perfect moment to learn more on the advantages offered by a premium elderly care home Cheshire located. According to the many positive reviews, this is the best…
By: Johny Danes in  Real Estate  >  Homes   Jun 03, 2016  
0
  Likes: 0

Cầu Thang Nhôm đúc Sang Trọng Cho Nhà Phố
Nhiều người khi lá»±a chọn phong thủy cho ngôi nhà mà không để ý đến cầu thang. Thá»±c chất, cầu thang có tác dụng rất lớn đến cấu trúc của căn nhà và ý nghÄ©a phong thủy. Có nhiều cách để thu hút nhiều năng lượng dÆ°Æ¡ng tràn vào nhà…
By: thinhvuonghouse in  Real Estate  >  Homes   Jun 02, 2016  
0
  Likes: 0

That Great Designer Purse 2016
So you have made the decision to invest hundreds or even even thousand of dollars on an reliable designer purse! Yay, I applaud you! But be forewarned... you should know exactly what you are shopping for ahead of you buy it!! You should make sure you do all of your…
By: moschinoonline in  Real Estate  >  Home Staging   May 31, 2016  
0
  Likes: 0

5 Great Tips on Keeping Up With The Ongoing Fashion Encouragement
But how does one keep track extremely up-to- go out with clothing inspirations? Read down the page and become familiar better! 1. Be web 2 fashion knowledge Social media stands out as the easiest low to medium where you can easliy get contemporary styles with our way inspiration. With a…
By: faiq1 in  Real Estate   May 30, 2016  
0
  Likes: 0

Article Views: 552    Report this Article