Most people would agree that stretching a dollar to do more with less is a good thing. Likewise, most would agree that jobs that pay workers a "living wage" are also good.

But when government, and not individual employers and employees, determines what constitutes a "living wage," the results are actually wasteful and harmful to citizens because it discourages public officials from prudently managing government resources through privatization.

Privatization—the sale or transfer of government assets or services to the private-sector—is an increasingly popular tool used by many public officials who want to improve services while controlling budgets. Unfortunately, cost-cutting privatization initiatives are running into roadblocks in many Michigan localities because of "living wage" laws that mandate that wages on government projects be set at artificially high levels.

Today, a Warren ordinance requires companies that win city contracts of more than $50,000 (which covers almost all of them) to pay a minimum hourly wage of $8.23 with full benefits, or $10.00 without benefits. In Detroit, the "living wage" is $8.27 with benefits and $10.33 without benefits. Specific features vary from ordinance to ordinance, but it is common to see the wage floor set significantly higher than the national minimum wage, which is currently $5.15 per hour. Grand Rapids, Ypsilanti, and other Michigan municipalities have adopted similar proposals.

What is wrong with these "living wage" laws, and how do they hinder the public benefits of privatization?

In a 1999 study on the impact of government-mandated wages, the Mackinac Center for Public Policy found that such laws, among other things:

  • Fail to help workers and actually hurt employment;

  • Slow job creation and economic growth; and

  • Foster racial discrimination in the construction trades.

The laws discourage privatization by making public service contracting too expensive for many private companies. If the wages private companies have to pay to workers on public projects are mandated at excessively high levels, then contracting for public services becomes unaffordable for those companies. Public-sector agencies, by contrast, can absorb the added costs because their budgets come not from profits but from taxation.

Leaders of unions serving government employees support "living wage" laws because it means they do not have to face competition from private contractors, who often employ non-unionized workers or workers from other unions who can do the same work for less.

The result is that opportunities to improve services and cut expenditures are lost, taxes are hiked on citizens to cover rising government costs, and workers whose education and skills do not yet measure up to the mandatory wage often black, Hispanic, or other minority workers either lose their jobs or can't get them.

But the primary purpose of the "living wage" has been accomplished: Public-sector union employees get to keep their jobs. U.S. Bureau of Labor Statistics data show that Michigan's public-sector union members, on average, are paid $16.60 per hour compared to $14.43 per hour in the private sector, a 15% difference.

A 1999 study of the Detroit living wage by economists David Neumark and Scott Adams found there is no requirement that city contractors hire Detroit residents. So, legislation that raises wages in the city may be benifitting people living outside the city. The citizens of Detroit may be paying more for city contracts to benfit workers who live outside of Detroit.

The study also found that there is no net economic benefit to the living wage. Benefits derived by recipients of higher wages were offset by losses incurred by the newly unemployed resulting from the higher mandated wages. The Federal Reserve Bank of San Francisco came to a similar conclusion in its study of the living wage.

Living wage laws discourage the privatization of governmental services and slow the growth of private companies that are forced to absorb these added employment costs. Citizens and taxpayers deserve a more rational policy that unburdens them from excessive and unnecessary government costs. Officials should repeal the wasteful and special-interest-driven "living wage" ordinances.

Robert P. Hunter, a former member of the National Labor Relations Board, is director of labor policy for the Mackinac Center for Public Policy.