There isn’t any other hot political debate that can match the divide between the rhetoric and the reality of the so-called “living” wage. The issue recently re-emerged on the national stage when Maryland became the first state in the nation to pass wage-level requirements on all state contractors. And before you could say “slippery slope,” living-wage advocates nationwide were calling on their local lawmakers to act likewise.
The activists say that requiring businesses to pay wages based on local cost-of-living expenses lifts low-income families out of poverty.
Has that actually happened in the 145 cities and counties that already have a living wage on the books? The data suggest “no.” In fact, the living wage has turned out not only to be a terribly ineffective anti-poverty tool, but to actually hurt poor, low-skilled workers by cutting into other forms of compensation or — in more than a few cases — getting them fired.
And most of the people it helps don’t really need the help at all. Research from Mark Turner of Georgetown University and Burt Barnow of Johns Hopkins University indicates that over 70 percent of families benefiting from living wages have family incomes almost double the poverty level, and that as high as 64 percent of families affected by living wages have “incomes above the 20th percentile.”
After studying the economic climates of over 100 jurisdictions around the country (both with and without living wage laws), economists David Neumark of the University of California and Scott Adams of the University of Wisconsin concluded that living wage laws “reduce employment among the least-skilled, especially when the laws… are accompanied by similar laws in nearby cities.”
In the case of Santa Fe, University of Kentucky economist Aaron Yelowitz found in 2005 that “almost the entire negative effect” of the city’s $8.50 living wage “was concentrated on the city’s least-skilled and least-educated employees.” These effects include an average reduction of 3.5 work-hours a week for high school dropouts, more than double the average for all Santa Fe employees.
The living wage’s counterproductive consequences are the product of two ironclad laws of economics.
The first — and obvious — one is that when something costs more, people buy less of it. The second is that wages are inextricably linked to skills.
Employers react to the living wage by cost-cutting (e.g., handing out pink slips and reducing hours) and looking for more skilled employees to justify the higher salaries.
At the same time, higher skilled workers are enticed by newly available higher paying jobs. So what happens? The least skilled workers — whom the living wage purportedly helps — end up getting replaced.
Ironically enough, at least some activists acknowledge these effects. Michael Reich, a prominent living-wage advocate from Berkeley, has admitted that “some … (productivity) increase” following a living wage “should arise because new hires may come from a more experienced or skilled labor pool.” Living wage apologist David Reynolds from Wayne Sate University has said that with a living wage in place, employers “should attract and retain the best workers (and) have the most productive workforce.”
On the other hand, there is a government assistance program that has a proven track record of helping out poor families without jeopardizing their employment prospects. It’s called the Earned Income Tax Credit (EITC), and it currently provides poor working Americans with up to $4,000 a year in tax-free income.
The aforementioned Turner and Barnow have found that the EITC is far better at combating poverty than living wages. They write: “EITC targets low-income families, while the living wage approach merely affects low-wage workers regardless of their family income.” And, in contrast to the living wage, “99 percent of families [covered by the EITC] have incomes below the 20th percentile.”
That means an expansion in the size and scope of the EITC would do exactly what the living wage is supposed to do but doesn’t: increase poor peoples’ incomes by rewarding hard work.