The Folly of "Living Wage" Laws

Living wage ordinances are being passed throughout the United States despite their perverse effects on local residents. As of November 2002, thirteen localities in Michigan, as well as the Washtenaw County Road Commission, have enacted living wage ordinances, with eight more considering enacting their own ordinances. Two perverse effects of living wage ordinances are 1) they benefit high-skilled workers at the expense of low-skilled workers and local taxpayers, and 2) they simply shift the cost of subsidizing low-income residents from the state and federal governments onto local taxpayers and businesses.

Economists are in fairly unanimous consent that the effect of a wage floor is to reduce employment opportunities for low-skilled workers. To illustrate, imagine that you and I are typists seeking employment at a bank that provides banking services to the local government. I, having greater skills, can type 100 words per minute while you type only 50. If the bank is willing to pay me $10 per hour, then their only incentive for hiring you is if you were to compensate them for your lower skills by accepting a lower wage. That wage, of course, given that you can produce only one-half of what I can produce, is $5 per hour or less.

Competition for jobs makes us willing to lower our salary requirements, just as competition between employers for our services forces them to increase their salary offers. I can eliminate you as a competitor for the job at the bank by breaking your fingers, thus maintaining my higher wage requirements. This, however, just lands me in jail for assault and susceptible to tort liability. Another way to eliminate you as a competitor (the caring way) is to accuse the bank’s owners of being heartless, greedy capitalists since no family can live on just $5 per hour.

I then organize a special interest group called, say, Workers for Justice, and lobby the local government to enact a wage ordinance that precludes the bank or any other firm that contracts with the local government from paying their workers less than $8.50 per hour. The effect is the same: I eliminate you as competition for the job. Now though, I am considered a thoughtful, caring hero instead of a cold and calculating villain.

We already know that some workers lose employment opportunities due to living wage ordinances, but what about those who might gain by an increase in their current salary (though it’s at the expense of others such as taxpayers and businesses)? Supposedly, because their incomes are now, say, $18,000 (the current poverty level for a family of four, or $7,300 more than what they had been earning had they been paid the current minimum wage of $5.15 per hour), they can now support their families. But this fails to account for the fact that they did not live off of just $10,700 per year prior to enactment of the wage ordinance. Low-wage workers receive supplemental income from the federal and state governments in the form of the earned income tax credit, rent subsidies, food stamps, Medicaid, etc., benefits that are indexed to the recipient’s income. As the worker’s income increases, their welfare benefits decrease; the worker may be essentially no better off than before, and quite possibly worse off.

Living wage ordinances do not increase worker productivity, so no new wealth is created for localities adopting them. The effect is simply to shift the source of supplemental income paid to low-wage workers by the federal and state governments onto others; residents of the municipality will pay higher taxes for the same level and quality of services as before, or face service cutbacks. The only winners are municipal employees and members of local labor unions who are now emboldened to demand higher wages since competition from low-skilled workers employed by private firms has been eliminated.

(Mark Steckbeck is Assistant Professor of Economics at Hillsdale College in Hillsdale, Michigan.)