Employment effects of living wage laws

July 31, 2012

Free Market Foundation

For some years, liberal groups in America like ACORN (Association of Community Organisations for Reform Now) have pushed hard to get so-called living wage laws enacted in cities and counties throughout the country. More than 60 jurisdictions have done so 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, which was $17,761 per year in 2000 or just $8,959 for a single person.

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 point is that it is silly to assume every worker is the sole wage earner in a four-person family, as living wage advocates do.

Living wage campaigns are mainly fronts for municipal employee unions who want to raise labour costs for potential private competitors.

In fact, a new study by economist David Neumark finds that existing government employees are the primary beneficiaries of living wage laws.

This is the main reason why he finds that living wage laws raise local wages.

However, Neumark also finds that forcing up wages causes demand for labour to fall; thus while workers covered by the living wage law typically see a 3.5 percent increase in wages, there is a 7 percent increase in unemployment among low-wage workers.

Taxpayers foot the bill for the higher wages. They may pay again when businesses relocate elsewhere, thus reducing the tax base.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 20, 2002; see David Neumark, How Living Wage Laws Affect Low-Wage Workers and Low Income Families, March 2002, Public Policy Institute of California.

For PPIC text http://www.ppic.org/publications/PPIC156/ppic156.alltext.pdf
For more on “Living Wage” Regulations http://www.ncpa.org/iss/min

FMF Policy Bulletin\26 March 2002