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Keeping the Poor Poor: The Dark Side of the Living Wage, Cato Policy Analysis No. 493

Keeping the Poor Poor: The Dark Side of the Living Wage, Cato Policy Analysis No. 493

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Published by Cato Institute
Executive Summary

For nearly a decade, activists on the left have

been conducting a highly effective nationwide

campaign to mandate local minimum wages at

levels that presumably eliminate poverty for full-time

workers and their families. This "living

wage," as it is known, is now the law in dozens of

jurisdictions, and dozens more are actively considering

similar measures. Typically, a living wage is

set anywhere from 50 percent to 100 percent above

the current federal minimum wage of $5.15 an

hour and often higher if employers do not provide

health benefits. Thus far, there has been only modest

resistance, even from local governments for

which the cost of doing business inevitably rises.



Most living wage ordinances apply to private-sector

government contractors and, to a lesser

extent, recipients of business aid or local government

employees, or both. Supporters insist that

the benefits are enormous and the costs minimal.

But that view is an illusion, a product of the insular

world of local government contracting. If the

living wage were applied to all employees across

the United States--the goal of advocates of a living

wage--it would greatly magnify the well-documented

pitfalls of the minimum wage.



Decades of research have shown that the minimum

wage harms the least-skilled workers from

poor families while heavily benefiting young

workers from middle-income households. Several

studies critical of the living wage come to similar

conclusions. The main beneficiaries of the living

wage are public-sector unionized employees

because of the reduced incentives for local governments

to contract out work. Instead of exploiting

grievances of the marginally employed against

"greedy" employers, advocates for the poor

should focus their energies on building the skills

of the poor.
Executive Summary

For nearly a decade, activists on the left have

been conducting a highly effective nationwide

campaign to mandate local minimum wages at

levels that presumably eliminate poverty for full-time

workers and their families. This "living

wage," as it is known, is now the law in dozens of

jurisdictions, and dozens more are actively considering

similar measures. Typically, a living wage is

set anywhere from 50 percent to 100 percent above

the current federal minimum wage of $5.15 an

hour and often higher if employers do not provide

health benefits. Thus far, there has been only modest

resistance, even from local governments for

which the cost of doing business inevitably rises.



Most living wage ordinances apply to private-sector

government contractors and, to a lesser

extent, recipients of business aid or local government

employees, or both. Supporters insist that

the benefits are enormous and the costs minimal.

But that view is an illusion, a product of the insular

world of local government contracting. If the

living wage were applied to all employees across

the United States--the goal of advocates of a living

wage--it would greatly magnify the well-documented

pitfalls of the minimum wage.



Decades of research have shown that the minimum

wage harms the least-skilled workers from

poor families while heavily benefiting young

workers from middle-income households. Several

studies critical of the living wage come to similar

conclusions. The main beneficiaries of the living

wage are public-sector unionized employees

because of the reduced incentives for local governments

to contract out work. Instead of exploiting

grievances of the marginally employed against

"greedy" employers, advocates for the poor

should focus their energies on building the skills

of the poor.

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Published by: Cato Institute on Mar 26, 2009
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For nearly a decade, activists on the left havebeen conducting a highly effective nationwidecampaign to mandate local minimum wages atlevels that presumably eliminate poverty for full-time workers and their families. This “livingwage,” as it is known, is now the law in dozens of  jurisdictions, and dozens more are actively consid-ering similar measures. Typically, a living wage isset anywhere from 50 percent to 100 percent abovethe current federal minimum wage of $5.15 anhour and often higher if employers do not providehealth benefits. Thus far, there has been only mod-est resistance, even from local governments forwhich the cost of doing business inevitably rises.Most living wage ordinances apply to private-sector government contractors and, to a lesserextent, recipients of business aid or local govern-ment employees, or both. Supporters insist thatthe benefits are enormous and the costs minimal.But that view is an illusion, a product of the insu-lar world of local government contracting. If theliving wage were applied to all employees acrossthe United States—the goal of advocates of a liv-ing wage—it would greatly magnify the well-docu-mented pitfalls of the minimum wage.Decades of research have shown that the min-imum wage harms the least-skilled workers frompoor families while heavily benefiting youngworkers from middle-income households. Severalstudies critical of the living wage come to similarconclusions. The main beneficiaries of the livingwage are public-sector unionized employeesbecause of the reduced incentives for local gov-ernments to contract out work. Instead of exploit-ing grievances of the marginally employed against“greedy” employers, advocates for the poorshould focus their energies on building the skillsof the poor.
 Keeping the Poor Poor
The Dark Side of the Living Wage
by Carl F. Horowitz
_____________________________________________________________________________________________________
Carl F. Horowitz is a Washington, D.C.,–area consultant on labor, welfare reform, immigration, housing, and other domestic policy issues. He was previously a housing and urban affairs policy analyst at the HeritageFoundation and a Washington correspondent for 
Investor’s Business Daily
.
Executive Summary
No. 493October 21, 2003
 
Introduction
The “age of the living wage” has arrivedwith a vengeance. In less than a decade, awell-organized coalition of communitygroups, labor unions, political parties, think tanks, and churches has coaxed dozens of local governments across the United Statesinto forcing designated employers to payworkers well above the current federal mini-mum wage of $5.15 an hour. Living wage jurisdictions include major cities such asNew York, Los Angeles, Chicago, andBaltimore plus a large number of smallercities and suburban counties. Local schoolboards and institutions of higher learningare participating as well. By the end of 2002there were 103 living wage measures on thebooks, enacted mostly by municipal andcounty general governments, and another 74campaigns actively under way.Activists defend living wage laws as protect-ing vulnerable entry-level workers from poverty.They also argue that such laws improve employ-ee morale and productivity, which in turnimproves employers’ profits. Local govern-ments, to the extent they pay contractors livingwages, deliver better services at lower cost.Residents are more satisfied with the quality of life, and the pathologies associated with pover-ty are reduced. Only exploitative employers andtheir political supporters lose. Common senseand human decency therefore require nationalas well as local action in the face of right-wingscare tactics. The federal minimum wageshould be made a “living” wage.The reality is quite different. At best, livingwage laws bring about modest benefits at ahigher cost to businesses and taxpayers.There should be little surprise in that. As anelevated version of the minimum wage, theliving wage magnifies the former’s labor mar-ket distortions. If applied to all employers inthe United States, the living wage wouldmake it far more difficult for first-time jobseekers, especially those coming off welfare,to find work. The economic case for the liv-ing wage is difficult to make. Indeed, somethree-fourths of economists surveyed by theWashington-based Employment PoliciesInstitute said that living wage laws wouldresult in employers looking for more-skilledemployees, thus crowding out the peoplewith the least skills—the very people whomliving wage laws are intended to benefit.
1
The Living Wage: Buildingon the Minimum Wage
A living wage differs from a minimumwage in several ways. First, a living wage is agood deal higher than the current federalminimum wage of $5.15 an hour and usuallyeven the (higher) state minimum levels.Dozens of ordinances mandate that affectedemployers offer health benefits or pay a high-er wage in lieu of benefits. To take one exam-ple, Cincinnati passed a living wage ordi-nance in 2002 requiring affected businessesto pay a living wage of $8.70 with health ben-efits or $10.20 without. New York City’s liv-ing wage, passed in 1996, mandates that for-profit contractors involved in security, clean-ing, food, and temporary services payemployees minimum rates set annually bythe city comptroller that may reach levels farabove the wage in Cincinnati.
2
Second, living wage laws apply, and cam-paigns to enact them take place, at the localrather than state or federal level. Cities, coun-ties, school boards, and, lately, colleges anduniversities have enacted living wage policies.Efforts to secure equivalent laws at the state orfederal level have not been successful thus far.
3
Third, living wage laws cover far feweremployers than minimum wage rules.Ordinances apply mainly to private-sectorgovernment contractors, business recipientsof economic development assistance, andlocal government employees. Only the ordi-nance enacted by the city of Santa Monica,California, covers employers generally, andeven in that instance it operates within arestricted geographic area. That is why livingwage laws, as of 2002, directly affected onlyabout 1 percent of workers in communitiesthat have such laws.
4
2
By the end o2002 there were103 living wagemeasures on thebooks.
 
The living wage movement, like the mini-mum wage movement, has a long historicalpedigree of religiously charged moralrhetoric. The term “living wage” first evolvedin the wake of the nationwide railroad strikeof 1877.
5
The people who coined the termbelieved employers could be coaxed into vol-untarily paying people on the basis of a stan-dard of need. Increasingly, social reformers,often motivated by religious conviction, sawa living wage as a necessary counterweight tothe abuses of industrialization. “[T]he firstAmerican minimum wage campaigns took on elements of a religious revival,” notedeconomists (and living wage supporters) SarLevitan and Richard Belous in their book,
 More Than Subsistence
.
6
Indeed, it was aCatholic priest, Msgr. John Ryan, who in1906 wrote the first book of consequenceadvocating a living wage,
 A Living Wage: Its Ethical and Economic Aspects
.
7
The current living wage campaign has itsorigins in the efforts of a church-led group,Baltimoreans United in LeadershipDevelopment, in alliance with the AmericanFederation of State, County, and MunicipalEmployees.
8
In Los Angeles a rabbi, anEpiscopal bishop, and a Methodist bishopcowrote in a
 Los Angeles Times
guest editorial,“We have a right and responsibility to seethat . . . employees are paid enough to sup-port themselves and their families in basicdignity.”
9
In their book,
The Living Wage: Building a Fair Economy
, advocates RobertPollin and Stephanie Luce quoteDeuteronomy 24:14 as an epigraph: “Thoushalt not oppress a hired servant that is poorand needy.”
10
San Jose mayor SusanHammer, writing in support of a proposedcity living wage policy, noted several years agothat such ordinances rest on a longstandingmoral claim:For nearly a century, the American peo-ple have insisted that in those caseswhere the demands of the marketplaceand our fundamental values clash, it isour values which must prevail. Thus,we prohibit child labor, and we imposehealth and safety requirements on fac-tories. Similarly . . . a hard day’s work should provide an employee with thenecessities of life—food, shelter, healthcare.
11
The living wage thus far has been local-ized and limited to selected employers, butsupporters want to institute it nationally andapply it to as many employers as possible.Fully realized, today’s living wage wouldbecome tomorrow’s minimum wage.
The Minimum Wage as aLiving Wage: A Critique
Displacement of Less-Skilled Workers
Congress established the first federal min-imum wage in 1938, as part of the Fair LaborStandards Act, and has raised it 19 timessince. More than 80 studies have demon-strated a link between an increase in the min-imum wage and subsequent job loss, espe-cially among teenagers and unskilled adults,the workers with the least skills, experience,and education.
12
The more employers have topay such workers, the less likely they are toemploy them. Those workers may turn out tobe productive employees, but they presentrisks to the employer so, given the minimumprice set by the state, the employer reducesrisk by hiring only more-qualified workers.Hyundais are less reliable automobiles thanHondas or Toytas. If the Hyundais could notcompete on the basis of a lower price, nonewould be bought.A review of the empirical research over thepast quarter century supports that thesis. In1977 Congress created a Minimum WageStudy Commission. Economists on the com-mission surveyed a broad range of studiesand estimated that a 10 percent increase inthe minimum wage decreased teen employ-ment by about 1 to 3 percent.
13
One skepticalresearcher not on the commission replicatedthe earlier study’s methodology and found ateen job loss of 0.6 percent.
14
3
Given theminimum priceset by the state,the employerreduces risk byhiring onlymore-qualifiedworkers.

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