More on the Economic Impact of Living Wage Ordinances
August 10, 2005
by Dylan Skriloff

According to researchers at Employment Policies Institute and many others, a living wage ordinance often has little positive impact for the working poor and has the potential to cause considerable economic problems.

A study by Dr. Richard S. Toikka of the Lewin Group, Dr. Aaron Yelowitz professor of Economics at the University of Kentucky and Mr. Andre Neveu chief economist of EPI, simulated the effects a living wage ordinance would have on a city population. They estimated that 78% of those affected were already above the poverty line and of the remaining percent only one third would be lifted above the poverty line. They pointed out that with a sharp rise in hourly wages, many working poor families would be subject to higher taxes and a loss of welfare benefits and many others would be priced out of the job market altogether.

Economist and NY Times columnist Paul Krugman, considered a liberal, wrote an article panning the effectiveness and feasibility of Living Wage ordinances. He noted that while Living Wage laws could increase the cost of labor by over 50% for some employees, it would result in only a marginal increase in their overall disposable income when accounting for the increase in taxes and loss of government benefits.

"Now to me, at least, the obvious question is, why take this route? Why increase the cost of labor to employers so sharply, which…must pose a significant risk of pricing some workers out of the market, in order to give those workers so little extra income? Why not give them the money directly, say, via an increase in the tax credit?" Krugman said in his article.

He said that while most Living Wage activists had their hearts in the right place they were applying unrealistic principles to the market economy instead of actually trying to make the system work better for everyone. He countered the claims of activists that an increase in costs to companies could easily be absorbed in the marketplace.

"You'll need to have a lot of faith in [their claims] to believe that," Krugman said.

There have been some studies that claim to show positive benefits associated with Living Wage laws, most drafted by advocates of the movement and followers of "radical economist" Dr. Robert Pollin. The Employment Policies Institute has challenged the validity of these studies, citing fraudulent or misleading data in some of them.

David Neumark of the Public Policy Institute of California found that the Living Wage laws produced a cup half empty, cup half full effect. While it benefited some families it also led to workforce reductions and higher costs of doing business.

The problem, critics says, is that Living Wage laws create out-of-market wages, sometimes for less-skilled workers. In return this also raises the amount that highly skilled workers expect to earn. Contractors need to make up for these costs somehow either by laying people off or kicking back the costs to the government and/or consumers. In some cases the wage increases can be simply absorbed by the company, but that is not always the case.

The forces behind the Living Wage movement are advocates of a much higher national minimum wage, which most economists agree could have a very destructive effect on areas the country with a low cost of living that could not afford to increase wages significantly.

Here are some problems cited by critics of the Living Wage movement and large hikes in the minimum wage.

• Most minimum wage workers are not supporting a family, but are teenagers or single adults.

• Most minimum wage jobs are only entry level positions. Employees usually work their way up the payroll the old fashioned way, by increasing their productivity and work skills.

• Raising the minimum wage can have a disruptive effect on the economy and result in job loss. Often times an employer will seek a more skilled worker, more qualified to earn the higher wage.

• Living Wage laws force contractors to increase their bids, bringing additional cost to the county that must be paid for in higher taxes or reductions of other services.

Other options to improve the plight of working class people.

• Affordable housing.
• Tax reduction and credits.
• Job training.

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