85th International Atlantic Economic Conference

March 14 - 17, 2018 | London, United Kingdom

Impact of increasing minimum wage on homeownership and home equity loans in the U.S.

Thursday, 15 March 2018: 10:50 AM
Hoa Nguyen, Ph.D. , Economics, Allegheny College, Pittsburgh, PA
The U.S. housing market is still recovering from the Great Recession. Meanwhile, multiple proposals have been put forward nationwide to raise the minimum wage. It is therefore important to examine the potential impact of increasing the minimum wage on the housing market. One of the lessons economists have learned from the 2007 downturn is that the decision to award a risky mortgage to individuals who may not have the ability to pay it off should be taken with great care. Those who work at or below the minimum wage level already struggle to make ends meet. The confidence their new income level instills in them might prompt them to take out a large loan such as a mortgage or a home equity loan (HEL). Owning property is an important step in the life of every individual, but in the long run, it is safer for both the subject and the market when homebuyers can really pay for their houses instead of engaging in risky mortgages and HELs. This paper investigates the impact of increasing the minimum wage in 2009 on homeownership and HEL probabilities.

Using the 2010 American Community Survey and the regression discontinuity model with fuzzy design, I compare the probability of getting a mortgage or a HEL in households of workers who are around the cutoff for minimum wages. I find that the households of minimum wage workers who receive a raise were 8 percent more likely to have a mortgage, and 11 percent more likely to take out a HEL than those of workers whose wages were slightly above the minimal wage cutoff and who had not received a raise. This paper fits in the broader literature about the socioeconomic impacts of increasing minimum wage and the determinants of homeownership. Moreover, it is one of the first studies to investigate the effect of raising minimum wage on homeownership and mortgage debts.