You don't need introductions to the $15 minimum wage proposal by President Biden. The subject has been a hot topic for debate among experts, both defending and attacking it.
Supporters claim it’ll help fight poverty and create better living standards for everyone. Others say it’ll make countless businesses close and crumble the economy. Who’s right? What does it mean for real estate?
Today, we'll go over the most important implications from this news and how every observation could affect commercial real estate.
Going back to the theory
Ontario’s Ministry of Labour, Training and Skills Development has an excellent article explaining minimum wages’ impacts on the economy. Elevating minimum wages above the market average reduces labor demand from firms.
That comes from the increase in costs for maintaining low-wage employees. In essence, this means that businesses will look to reduce costs with lay-offs and other areas.
How can companies offset these cost increases?
The most important observation from the article is that many companies absorb these expenses without firing employees. That often means reducing expenses, like training, fringe benefits, and more.
With remote work and eCommerce becoming more popular, office and retail space could become the expense mentioned above. Increasing product prices is another common strategy, which could reduce footfall.
Minimum wages and low-wage worker employment
The article suggests that a 10% increase could result in up to 3% employment reduction, particularly for younger workers. While in Canada, history seems to prove this idea, the US is a lot more debatable.
With no natural consequence in low-wage employment, consequences might vary for CRE. However, employees like janitors and gardeners will undoubtedly become more expensive.
Hours worked and wage/income distribution
Firstly, reducing working hours is another way to offset wage costs increases without firing employees. Wage distribution often increases more significant wages, and income distribution usually stabilizes, reducing inequality.
For commercial landlords, this could mean two things. Firstly, the need for full-time commercial space could decline. However, income equality could increase footfall for businesses not relying on minimum wage work.
Poverty
According to the article, the link between minimum wages and poverty is relatively weak. That's because most poor households lack employed workers, and others already work for more than minimum wage.
Most minimum-wage workers are young people or members of multi-earner families. Therefore, minimum wage positions are rarely the primary income stream. The study suggests that only 12.5% of minimum wage employees in 2011 were from poor households.
Training
Finally, multiple jobs offer a minimum wage in exchange for additional training as part of the job. This training could experience reductions or increases depending on the position. Naturally, more critical positions yield better returns despite the increased salary.
The evidence seems to point towards a minimal negative effect over on-the-job training. Therefore, services like software implementation become more valuable if training and support are included.
What do labor economics experts have to say?
This article from The Heritage Foundation on the history and effects of the minimum wage also offers excellent insight. It also mentions that long-term consequences stem from low-wage positions being learning-centered jobs.
The majority of minimum wage employees receive raises within a year. Reducing the supply of these positions removes the first step for many people's careers.
Where does the minimum wage go?
Most people believe minimum wages go to struggling families who can't make ends meet. Most minimum-wage workers (of the 2.9% of minimum earners) are still in school. Most adults earning minimum wage do so via part-time jobs or not as the only income stream.
For CRE, this means that—at most—the benefit will be increased clientele for tenant businesses.
Wages and positions: the actual function?
Most minimum wage positions are entry-level. In other words, they're intended for workers with little experience and education. Usually, it's the "preparation" stage before moving them to more critical positions.
That means unemployment mostly comes from reducing these positions. However, given how important they can be to start a career, long-term complications are possible.
Does it affect labor demand?
Most of the time, rising prices reduce demand. People tend to avoid goods and services with noticeable cost increases. The same is true for businesses.
Unless productivity and income increase along with the minimum wage, companies will hire fewer workers. Even if lay-offs don't become a problem, job supply can still suffer.
General employment impact
Most debates around minimum wage focus on small gradual increases. President Biden’s minimum wage shouldn’t be sudden.
Realistically, the minimum wage isn't part of many people's lives. Therefore, the economy's impact should be negligible as long as it's gradual (more on that later).
Disadvantaged workers
Interestingly, minimum wage raises don’t affect overall employment as much as it does for disadvantaged workforce employment. They attract more people toward these positions, leaving out those who already faced difficulties finding work.
We need to consider what this means for business traffic. If that’s the case, the change might be negligible, as those who didn’t make regular clients will likely stay that way.
What about families in poverty?
We already covered this to talk about the small change it signifies for low-income families. Most advocates seem to agree that an employment decrease for better payments is worth it.
The problem comes with how wage increases reduce low-income families' eligibility for welfare programs and tax benefits. Healthcare also removes benefits once wages surpass certain thresholds.
But, could the US increase benefit the economy?
This article by NBC News seems to contradict the previous statements. It’s worth noting that the article mentions several states already increasing minimum wages for years.
Therefore, it’s hard to measure the real impact of Biden’s raise if several regions already implemented it. Luckily, that means CRE will likely not experience many changes as a result.
What do people think?
The article explains that most Americans support the $15 minimum wage. The article also goes through the inconsistent evidence of minimum wage increases promoting job loss, as we mentioned.
Additionally, experts explain that increasing cash flow stimulates the market. Gradual increases benefit average income without noticeably affecting employment.
How many would benefit?
The $15 minimum wage would boost earnings for 27 million employees, with 17 million earning less than $15 per hour. The other 10 million would benefit from spillover.
Another argument is that the US minimum wage keeps decreasing in value with inflation. Raising the minimum wage should benefit workers and businesses alike by encouraging cash flow and spending.
Can companies save costs?
Finally, turnover is noticeably less likely with better wages. While we mentioned training becoming less common, employee retention would increase, lowering the need for said training.
For commercial landlords, that means tenants should enjoy more productivity and profitability. Therefore, it could theoretically boost rent stability.
Most common minimum wage beliefs
This article by Critical Funatic is another exciting read. We say it's interesting because it's not about the US, but it discusses several of the arguments made by supporters and detractors.
It debunks the most common "myths" from minimum wage raises. What's intriguing is that it mentions both parties are wrong and right simultaneously.
Greater inflation
The $15 minimum wage in California caused businesses to increase prices, negating purchasing power.
Luckily, channeling this increase in a more extended period reduces the likelihood of a price hike. According to the article, drastic implementation is the problem.
Higher unemployment
Similarly, unemployment in California skyrocketed to record highs after the $15 minimum wage implementation. The increase was dramatic when compared to the previous year.
The increase needs to be under control for the benefit to occur. Calculated increments have proven not to cause unemployment.
Closing down small businesses
Finally, the strongest argument against minimum wages is that it hurts small businesses. The article summarizes everything into more of the same: only drastic measures are harmful.
Small businesses make a significant portion of commercial tenants. Correct implementation could improve clientele influx to these businesses thanks to higher purchasing power.
However, drastic implementation could cause businesses to close down. Therefore, it’s vital to stay on top of future news.
Why is Biden cutting out the wage increase for now?
That said, it might be long before this wage becomes a benefit or a problem. Biden’s COVID-19 stimulus proposal made it through the voting process, but not in its entirety. The $15 minimum wage was the casualty.
The reason is the vital observation. Defenders of the stimulus package stated that the $15 federal minimum salary would devastate small businesses. They’ve been the biggest victims of the pandemic, and they couldn’t afford this change.
Additionally, while supporting higher wages, the $15 reform would do more harm than good right now. The minimum wage has been set to gradual increases until the $15 milestone arrives in 2025.
That means the economy shouldn’t experience significant changes as it occurs. Most importantly, it’ll avoid the main pitfalls from these changes: drastic implementation. As is, CRE shouldn’t face too many problems, especially since tenant businesses won’t have to cope with significant expense increases.