Living Wage: More Not Always Better, Study Finds

Kate Monaghan | July 7, 2008 | 8:06pm EDT
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( - The so-called "living wage" -- a higher minimum wage -- may be more of a hindrance than a help, suggests a recent study issued by the Employment Policies Institute. The study found that prices tend to surge as unemployment rises in municipalities that require employers to pay more than the federal or state minimum wages.

Communities across the country have forced employers to pay living wages an average of $8.78 per hour when benefits are included and $10.33 per hour when benefits are excluded. The federal minimum wage is $5.15 an hour.

"Municipalities that adopt living wage ordinances holding various things constant, have on average ten percent lower employment after adoption," said Robert Strauss, an economics professor at Carnegie-Mellon University, who conducted the study for the Employment Policies Institute.

"What is the social cost of living wage ordinances?" Strauss asked during a discussion hosted by the New America Foundation. "In effect prices are going up, property taxes are going up. Somehow these things are getting financed at the local level and that creates what we call deadweight loss."

Strauss admitted that he was surprised by the outcome of his study.

"The minimum wage did surprisingly well in moving low wage earners above the federal poverty line and the living wage did surprisingly less than I expected," said Strauss. "A family of three working full time (2,080 hours per year) is not necessarily better off under a living wage than under a minimum wage."

However, Wendell Primus, senior policy adviser for House Minority Leader Nancy Pelosi (D-Calif.), disagreed with Strauss' assessment.

"I think it really hinges on the political system and if our political system is not willing to redistribute income, then I think we have no choice but to go to a living wage concept," Primus said.

The only way to help low wage earners is through income redistribution in the form of taxation, he said. "If you can't raise taxes you're not going to be able to redistribute any income whatsoever."

However, James Sherk of the conservative Heritage Foundation argued that the living wage does not favor low wage workers, it hurts them. "We all want to think about the living wage and these policies as ways to help low income workers and help lift them up," said Sherk. "But there's some pretty good theories and studies out there that suggest these aren't protection for low wage workers, it's a protection from low wage workers by higher wage workers who don't want to face competition from someone who will undercut them."

Strauss concluded that the main problem with bringing people above the poverty line as the living wage proposes to do is not an economic fault but rather a problem with education.

"Inside the beltway and state capitols, if people really want to do something to improve wage distribution, then they ought to make sure that what's going on in public education is productive itself," said Strauss.

He continued, "If this country doesn't wake up, there isn't going to be a future and there won't be an income to redistribute if you want to go down the [living wage] road."

"Well intentioned people are having bad, unintended consequences by pursuing these ordinances at the local level," he said.

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