Monday 9 October 2023

The minimum wage and homelessness

The minimum wage has a number of effects, both inside and outside of the labour market (see the links at the end of this post for more). Low-income workers (such as many of those working for the minimum wage) are particularly vulnerable to any negative effects it may have. For that reason, I was really interested to read this recent working paper by Seth Hill (University of California San Diego), on the relationship between minimum wages and homelessness.

There are a couple of reasons to expect that higher minimum wages might increase homelessness. If minimum wages decrease employment (a result that is contested, but I believe it is likely given the galaxy of literature we have to date; again, see the links at the end of this post), then higher minimum wages may directly increase the risk of people becoming homeless. That's because when low-income people workers lose their jobs, they may no longer be able to afford to pay rent, and may lose their homes. Second, if minimum wages increase incomes for those that are not made unemployed, they may increase the demand for housing, pushing up rents. This may indirectly increase the risk of people becoming homeless, who can no longer afford the higher market rent.

Hill looked at municipality-level changes in minimum wages in the U.S., coupled with municipality-level data on homelessness from the Department of Housing and Urban Development's Annual Homeless Assessment Reports (which provides data on the number of homeless in each municipality in January each year). Hill used multiple different estimation methods, including: (1) an event study design; (2) a stacked regression estimator; and (3) a local projections difference-in-differences (DiD) estimator. For our purposes, we don't need to get too much into the details about the different methods, since they all point in the same direction. Hill finds that, in the event study analysis:

Municipalities that increased minimum wages by up to $2.50 per hour from 2013 to 2018 saw an average increase of 14 percent in homeless counts in the years 2014 to 2019 relative to municipalities with no nominal change in the minimum wage (real decline) or with changes pegged to inflation (real no change). Municipalities that increased minimum wages by more than $2.50 per hour from 2013 to 2018 saw an average increase of 23 percent in homeless counts in the years 2014 to 2019 relative to municipalities with no change. A dynamic version of this analysis suggests the increase in homeless counts increases as time passes.

For the stacked regression estimator:

Increases of $0.75 or more in local minimums increased relative homeless counts by about 25 percent in the years following the increase. All results hold with controls for changes in local income and local population.

And finally, for the local projections DiD estimator:

...when cities raise their minimum wage by 10%, relative homeless counts increase by three to four percent.

Overall, all of the results suggest that when the minimum wage increases, homelessness increases. Hill then goes on to consider the mechanisms that might explain this relationship, and finds that:

Using the event-study estimator to evaluate mechanisms, I find that increases in the minimum wage decreased employment among low-skill workers and increased costs of local rental housing in my sample.

That seems to support the theoretical direct and indirect effects of minimum wages on homelessness that I outlined at the start of the post. The minimum wage may make some workers better off, but it has unintended consequences. Here is another consequence that policy makers and others need to take account of.

[HT: Marginal Revolution]

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