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THE SMITH CENTER | for Private Enterprise Studies |
As of July 2001, sixty-two municipalities (cities, counties and government school districts) in twenty-four states had enacted "living wage" regulations affecting all private and non-profit enterprises with which they do business. California, Michigan and Wisconsin have more living wage ordinances (LWOs) than other states, but LWOs are spread widely over the entire country. Moreover, there are active campaigns to establish new LWOs in all states except Alaska, Idaho, Wyoming, North Dakota, South Dakota, Mississippi, and West Virginia. It is only a matter of time before municipalities in those states are targeted. According to the Employment Policy Foundation (EPF), which is the best single source of data on LWOs, a total of seventy-five living wage campaigns are now active in thirty-seven states. There even are or have been campaigns to adopt statewide LWOs in sixteen states. EPF data and commentary on the issue can be found at www.livingwageresearch.org.
An LWO requires that all enterprises doing business with the municipal authority pay their employees no less than the specified living wage, which differs from jurisdiction to jurisdiction. There are stiff penalties, including pack pay awards, fines, and loss of contracts imposed on firms that violate LWOs. Typically an imposed living wage is 50% to 100% higher than the current federal minimum wage of $5.15 per hour. An LWO is nothing other than a minimum wage regulation imposed at the local, rather than the state or federal levels, with the exception that it applies only to firms doing business with the municipal authority that imposes it. State and Federal legal minimum wage statutes preempt local wage ordinances as they apply to other private firms. However, twelve private universities, including Harvard and Stanford, as well several private enterprises, have been importuned to adopt their own living wage policies without government mandates. LWO campaigns undertaken at private firms are modeled after the old union "corporate campaigns" of the 1970s and 1980s. They involve concerted efforts to ruin the reputations of those who do not surrender as well as picketing, demonstrating, boycotting and otherwise threatening them. All, of course, in the name of "social justice." In all settings other than labor such actions are called extortion.
The Perpetrators
The Association of Community Organizations for Reform Now (ACORN) which calls itself a "grassroots" organization, but is mostly a collection of 1960s radicals who, since the worldwide collapse of socialism, need other ways to pursue their anti-market agenda, initiated the living wage movement in the late 1980s. ACORN's crusade was soon joined by John Sweeney's AFL-CIO and several of its constituent unions together with welfare advocacy groups of various descriptions and the usual coterie of well meaning but economically benighted religious groups.
John Sweeney has always identified himself as a proponent of democratic socialism and an opponent of free markets; so he is a natural ally of ACORN. The payoff to individual unions, such as the Service Employees International Union, is three-fold. First, living wage ordinances increase the price of union-free labor relative to unionized labor, thus increasing the demand for unionized labor. This has always been a major reason for the unions' support of legal minimum wages. The unions have become impatient with federal and state governments' slow and, to them, meager increases of legal minimum wages and are delighted to endorse the more radical increases proposed by ACORN. Second, LWOs often include requirements that covered employers remain neutral in any union organization campaigns. Unions have been losing market share in the private sector ever since the mid 1950s, and that decline accelerated during the 1980s and 1990s. Thus they are eager to prevent employers from being able to explain the downside of unionization to their employees. Third, LWOs involve the creation of committees to oversee their implementation. Unions are always heavily represented on such committees, and they dominate many of them. In such cases unions effectively have veto power over both the level of the living wages that are imposed and the determination of which firms are eligible to get municipal contracts.
Many self identified welfare advocacy groups e.g., Jessie Jackson's Rainbow/Push Coalition -- are more interested in the preservation of their own existence and their visibility in the press than they are in the actual welfare of low income people. Welfare advocacy groups that really are interested in promoting the interests of low income people and support the imposition of living wages simply are unaware that, like all legal minimum wage statutes, LWOs hurt the very people they are intended to help.
Religious groups that support LWOs are also ignorant of their actual, rather than their intended, effects. The Catholic Church and most other Christian denominations claim to have a "preferential option for the poor." Inasmuch as it is indisputable that economic systems built on private property, voluntary exchange, and the rule of law have consistently created much more wealth, and distributed it much more widely than command and control systems of all kinds, it seems to me that actually to exercise a preferential option for the poor one must oppose LWOs and all kindred anti-market government policies.
The Alleged Need for LWOs
Proponents of LWOs start by doing some simple arithmetic. Full time work is defined as at least 2000 hours per year. The federal minimum wage is $5.15 per hour. This means that a full time minimum wage worker may earn only $10,300 per year. That figure is below the 2001 Department of Health and Human Services poverty threshold for all family sizes larger than one. The threshold for a family of four was $17,650 (see www.census.gov). Clearly, according to LWO proponents, this is unacceptable. Just to reach the poverty threshold for a family of four the wage must be $8.82 per hour, and a decent "living wage" (which does not mean a wage for decent living) should be significantly more than that. That's it. That is essentially the whole argument offered in support of LWOs.
This argument paints a purposefully misleading picture of the situation of minimum wage earners. Its proponents would like us to think that the typical full time minimum wage earner is the sole earner in a family of four. Moreover, their rhetoric suggests that the typical full time minimum wage worker is a single mother struggling to make ends meet against all odds. EPF research demonstrates this is simply not the case. A household with two full time minimum wage workers earns $20,600, well above the 2001 poverty threshold for a family of four. When opportunities for overtime are considered such households can easily have earnings that exceed the 2001 poverty threshold for a family of five. Only seven percent of people who are paid between $5.15 and $7.15 per hour are single parents, and one-half of workers who earn $7.15 per hour or less live in households with annual incomes over $42,671. Approximately forty percent are children or other relatives of a family head who earns much more than the legal minimum wage. And none of these figures take into account employer and government benefits received by low income households.
The crisis to which LWOs are alleged to be the solution simply doesn't exist. Some poor will always be among us, but the force that ameliorates poverty better than any other is economic growth. Measures which impede economic growth, such as LWOs which corrupt the information content of wages and prices and distort incentives to work and acquire marketable skills, ultimately hurt the very people the proponents of LWOs assert they wish to help.
Some Economic Effects of LWOs
The effects of increases of legal minimum wages on the employment prospects of workers who are least experienced, least well trained, and who have not developed good work habits and attitudes are well documented. Each ten percent increase of a legal minimum wage results in job losses of from 1.3 percent to 2 percent. Profit seeking employers are willing to continue the employment of a worker if and only if the cost to the employer of the worker's services is not greater than the amount of money the employer would lose from sales (net of the cost savings on materials and supplies no longer used) if he lays off the worker. So when legal minimum wages are imposed in any form, including living wages, some workers will be let go. The ones that are always let go first are those who are the least productive. (The lost output and sales that follow upon letting a worker go will not amount to much in the case of a worker who isn't very productive.)
Sometimes profit seeking entrepreneurs will try to avoid layoffs by cutting non-wage compensation paid to workers. For example, reductions in paid vacation time, employer contributions to retirement funds, employer paid medical insurance, and rates of sick leave accrual can sometimes offset the effect of a higher legal minimum wage. If so, affected workers will keep their jobs, but they will not be any better off than they were before the minimum wage increase. In fact, they will probably be worse off because more of their compensation will be taxable than before.
Not only will the least productive workers lose their jobs, every time there is an increase in a legal minimum wage young people just entering the labor force with little experience and training will find it more difficult to get first jobs. The surest route to becoming a productive worker for people who have little training and education is on-the-job experience. All increases in legal minimum wages make it more difficult for the disadvantaged to follow that route.
EPF researchers have pointed out a unique harm done by LWOs. The high school drop out rate of workers who earn between $5.15 and $8.15 per hour is double that of workers earning between $8.15 and $10.15 an hour. To the extent that an LWO results in increasing the number of high school dropouts receiving more than $8.15 per hour, the wrong message is sent to both groups. High school dropouts learn that politics trumps education and training in wage determination, and the more productive learn that their training and education gives them fewer advantages than before. The productivity of both groups will decline, and younger people still in school will have less of an incentive to stay there.
In Conclusion
The living wage scam is undoubtedly in the interests of unions,
1960s radicals and other enemies of free markets, but it is certainly not
in the interests of all the disadvantaged workers who are harmed thereby.
Of all the arguments of socialists and their contemporary successors, it
seems that those based on confusions about labor and labor markets are
most enduring. I think that is because humans everywhere are prone to envy.
If A earns more than B, and B doesn't like it, there is a perverse profit
opportunity for anti-market entrepreneurs to blame it on the alleged injustice
of fee markets. The record is clear: The pursuit of economic equality though
the political marketplace eventually results in almost everyone, except
political elites, having less than they otherwise would. In contrast. individual
pursuit of economic success in free markets under the rule of law never
leads to equality of results for everyone, but it always results in almost
everyone having more than they otherwise would. Let's hear it for the Tenth
Commandment.