'Living' Wage Measures Hurt Business and Poor

There is good news in San Diego. If certain "social justice" groups have their way, a simple legislative act by the City will all but eliminate poverty and the lack of health insurance for San Diego’s working poor. It seems the condition of those earning minimum wage has nothing to do with economics and everything to do with "compassion." If only elected officials had the political will, they could wave their magic wands and eradicate poverty as we know it!

The latest cure-all comes in the form of the "living" wage, an über-minimum wage set higher than state and federal minimum wages, that is calculated to allow a family of four to obtain "adequate" health care and housing and exceed the poverty line solely on the living wage earner’s salary. Living wage ordinances (LWOs) are typically set between $12 and $15 per hour and are targeted at municipal governments and their contractors.

Over the past decade, more than 100 municipalities have adopted LWOs. In California alone, LWO campaigns are currently being waged in Monterey County, Sacramento, San Anselmo, San Diego, San Mateo, Santa Barbara, Santa Monica, Sonoma County, and Ventura County, as well as on college campuses such as Stanford University and the University of California, San Diego. In July, a rally was held in downtown San Diego to support the adoption of such a LWO. Groups such as the Center on Policy Initiatives and the San Diego Living Wage Coalition have been lobbying San Diego City Council members to implement a minimum wage, or "living" wage, of $11.95 per hour (or $14.48 per hour for those without health benefits) for all employees of the City and businesses who contract with the City.

City Council members Michael Zucchet and Donna Frye, who attended the rally, are optimistic about the logic of the measure and the ordinance’s likely success. According to Zucchet, "This is not complicated. Over the years, the city has been contracting out good-paying city jobs to private contractors who cut costs by paying an ‘unliving’ wage." Added Frye, "It makes inherently good sense." Let us take a closer look at the proposal, however, to see if it really is "good sense," or just nonsense.

The claim that we can legislate our way out of poverty is clearly absurd and begs the question: If raising the minimum wage to $11.95 or $14.48 per hour will raise the standard of living for the working poor, why stop there? Why not raise the standard of living for the middle class as well by increasing the minimum wage to, say, $20 an hour? If we raised it to $100 an hour, we could have the best standard of living in the world! This is preposterous, of course, because raising the minimum wage would have other consequences and people would change their behavior accordingly.

For example, leaving out the questions of which factors should be included in calculating a proper "living" wage (Should we include health care and housing? What about transportation expenses or office supplies or "a personal computer in every pot?") and which government officials or lobbying groups should be allowed to decide on an arbitrary minimum wage figure, let’s assume the hourly minimum wage is raised to $100. But raising the minimum wage does not reduce the cost of providing goods and services to the City or its contractors. What are the City and its contractors to do? They have two choices: pass along the new higher costs to consumers by raising prices for their services (for the City government, this means raising taxes) or cut costs, most likely by firing low-level employees and trimming salaries and/or benefits for remaining workers.

Since it no longer makes sense to pay employees $100 an hour to stuff envelopes or dig ditches, the City and its contractors will most likely let people performing these tasks go and spread menial tasks among the existing higher-paid staff. At such a high cost of doing business, unemployment will increase dramatically. Note that not only are former employees now out of a job, but the poorest and least experienced workers really have no chance of gaining employment. The poor job seekers targeted by the minimum wage plan thus are not only not making $100 an hour, they are making $0. While this may seem to be an extreme example, the principle is the same for the current LWO and the results will simply take place on a smaller scale.

This should not be a surprising result. Any competent economist will tell you that price controls always create shortages. Just look at the results of rent control laws or the energy price controls of the 1970s that created large gas station queues for examples. Minimum wage laws are simply a form of price control, in this case, a control on the price of labor.

Ironically, such measures invariably hurt the very populations they purport to help. Those earning minimum wage do not earn more because they are the least skilled and the least experienced. They typically consist of young people entering the labor market for the first time, high-school dropouts, and non-English speakers. Minimum wage earners are not destined to remain minimum wage earners, however. This is because the skills they learn make them more valuable to current and future employers. It is precisely these people that are trying to work their way up in the world that are hurt the most by minimum and living wage laws because now they not only have to compete for jobs against others willing to work for minimum wage, they have to compete against those with higher skills who are willing to work for $8 an hour, $9 an hour, all the way up to $11.95 an hour. Thus, it should come as no surprise that labor unions are always in favor of minimum wage legislation. They know that when the minimum wage is increased, low-skilled labor becomes more expensive to employers (thus, higher-skilled labor has become relatively cheaper), so employers become more likely to hire the higher-skilled union workers.

But what about the argument that many of those earning minimum wage utilize city welfare programs, and that boosting their incomes would decrease their dependence upon such city services and thus actually benefit the taxpayer. As City Councilman Zucchet says, "[City officials] should not be creating jobs with public tax dollars that by definition are going to require people to be on other forms of public assistance." In answering this charge, let us ignore that most minimum wage earners are not heads of households, but rather are those new to the labor market, such as teenagers or college students living with their parents, or are other family members working to provide a little supplementary income. Let us further ignore that fully half of those who earn $7.15 per hour or less nationally are members of households with annual incomes of over $42,761. Even if we additionally ignore the analysis presented earlier and assume that in Mr. Zucchet’s world the poorest and least employable would be the ones benefiting from the living wage ordinance, Mr. Zucchet is wrong to claim that taxpayers would realize a net benefit from the implementation of a living wage ordinance.

According to Mr. Zucchet, taxpayers should be comforted because, under a living wage ordinance, some of their tax dollars that formerly went into to city welfare programs will now go toward the City’s increased labor/personnel costs. Of course, someone must administer and enforce the ordinance, so even more tax dollars must be spent on regulation. So much for taxpayer savings.

The simple truth is that you cannot foster economic growth by decree. Try as it might, government cannot create jobs; entrepreneurs create jobs. Our nation, and the freedoms it offers, is based on a system of voluntary exchange and free markets. Thus, in addition to the practical arguments made above, minimum (or "living") wage laws are immoral because they prohibit individuals from competing for employment and voluntarily agreeing to the terms of their own labor with employers for all prices below the minimum wage cap. Passing a minimum wage law does not automatically repeal the laws of supply and demand. As is the case with most government programs, the living wage ordinance is rooted in good intentions, but bad economics (and we all know where the road paved with good intentions leads us).

October 10, 2003

Adam B. Summers [send him mail] is a freelance writer and Visiting Policy Analyst at the Reason Foundation. He holds a Master's degree in economics from George Mason University. An abbreviated version of this article appeared in the Orange County Register on August 12, 2003 as "Let's end poverty by decree!."

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