The truth about the so-called 'living wage'

Posted: Mar 19, 2002 12:00 AM
For some years, liberal groups like ACORN (Association of Community Organizations for Reform Now) have been pushing hard to get so-called living wage laws enacted in cities and counties throughout the country. They have been extremely successful, with more than 60 jurisdictions having enacted living wage ordinances since the first in Baltimore in 1994. Typically, living wage laws require city contractors to pay their employees a wage significantly higher than the minimum wage as a condition for doing business with the city. Living wage rates are often tied to the poverty-level income for a family of four. In 2000, this figure was $17,761 per year. The equivalent figure for a single person was just $8,959. Thus one effect of a living wage law is to pay single people and two-earner couples considerably more than a living wage, as defined by the poverty level. The former would get $8,802 more than he really needs, while a two-earner couple where both work in jobs covered by a living wage law would make twice as much. Of course, it would be illegal to pay people working the same job differently depending on whether they are married or single, or have children or a working spouse. But at the same time, it is silly to treat every worker as if he or she is the sole wage earner in a four-person family, as living wage advocates do. In principle, people should be paid according to the value of their output, irrespective of race, age, sex, family status or other extraneous factor. Living wage advocates are not interested in hearing about productivity, supply and demand, or anything else to do with economics. Their campaign is based on nothing but emotion. They simply assert that people who work for companies doing business with local governments ought to be paid more than those doing the same work in companies not doing business with government. No explanation is given for why this should be the case. Somehow or other, it is just the fair thing to do, we are told. The truth is that living wage campaigns are mainly fronts for municipal employee unions. Their goal is to raise labor costs for potential competitors. If government contractors have to pay their workers more because of living wage laws, then they are less likely to replace traditional government workers. This makes it easier for government employee unions to demand higher wages for their members, because the option of saving money by contracting out has been undercut. A new study from the Public Policy Institute of California by economist David Neumark documents this fact. He finds that existing government employees are the primary beneficiaries of living wage laws, even though such laws do not apply to them -- only to government contractors. This is the main reason why he finds that living wage laws do in fact raise wages in places where they are enacted. However, Neumark also finds, as economic theory would predict, that forcing up wages causes demand for labor to fall. The higher wages for some workers are offset by higher unemployment for others. The former would see a 3.5 percent increase in their income under a typical living wage law, while there would be a 7 percent increase in unemployment among low-wage workers. Economic theory tells us that it is improper to make interpersonal comparisons of value. There is simply no way for an economist to say that one person's higher wages offset someone else's unemployment. Contrary to this standard practice, Neumark asserts that the higher incomes of those benefiting from living wage laws does in fact compensate for the lost income of those unemployed by the law. He bases this conclusion on data showing that poverty rates fell slightly where living wage laws were enacted. This has made Neumark a hero to the living wage crowd. Neumark also seems to have forgotten that someone is paying the bill for the higher wages. That person is the taxpayer, who must pay higher taxes for the same government services. He may pay again when businesses relocate from places where living wage laws are enacted, thus reducing the tax base. The actual cost of the living wage law may not be very much, but why would a business want to locate in a place where a bunch of left-wing nuts seem to be running the show? "What will be next?" businessmen have to wonder when deciding where to locate. Economists have an expression, "There ain't no such thing as a free lunch." Government can't give anyone anything it hasn't first taken from someone else. Understanding this simple point is all that is necessary to see the basic lunacy of living wage laws.