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Laws Defy Basic Economics and Hurt Intended Beneficiaries
By Adam Summers
Certain "social justice" groups have discovered yet another panacea for eliminating poverty for the working poor. The latest cure-all comes in the form of the "living wage," an uber-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 targeted at municipal governments and their contractors.
Over the past decade, more than 100 municipalities have adopted such laws. Just last month, a rally was held in San Diego to support a LWO that would mandate hourly wages of $11.95 (or $14.48 for those without health benefits) for all city employees and businesses that contract with the city. Other LWO campaigns are now being waged in Sacramento, San Anselmo, San Mateo, Santa Barbara, Santa Monica, Monterey County, Sonoma County and Ventura County, as well as on campuses such as Stanford and UC San Diego.
Most minimum-wage earners are not heads of households, however, but those new to the labor market, such as teens or college students living with their parents, or other family members working to provide supplementary income. In fact, fully half of those who earn $7.15 per hour or less nationally are members of households with annual incomes over $42,761.
An even more basic problem with the "living wage" is the laughable notion that we can legislate our way out of poverty. It begs the question: If raising the minimum wage to $12 or $15 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, $25 an hour? If we raised it to $100 an hour, we could have the best standard of living in history!
This is ridiculous, of course, because raising the minimum wage would have other consequences and people would change their behavior accordingly. Let's assume the hourly minimum wage is raised to $100. What are the city and its contractors to do? They have two choices: pass along the higher costs to consumers by raising prices (or raising taxes for the government) or cut costs. Since the city and its contractors can no longer afford to keep their staffs at current levels (it no longer makes sense to pay employees to stuff envelopes or dig ditches at $100 an hour), they will likely let these workers go, spread menial tasks among existing higher-paid staff, and cut salaries and/or benefits for remaining workers. Unemployment would increase dramatically.
The working poor targeted by the minimum wage plan would now have to compete for jobs not only against others willing to work for minimum wage, but also against those with higher skills who are willing to work for $8 an hour, $9 an hour, all the way up to the living wage. Thus, not only are they not making $100 an hour, they are making $0. While this may seem to be an extreme example, the principle is the same for any "living wage" law; the results will simply take place on a smaller scale. It is precisely the people who are trying to work their way up in the world that are hurt the most by minimum and "living wage" laws.
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.
Passing a minimum wage law does not repeal the laws of supply and demand. As is the case with most government programs, the "living wage" is rooted in good intentions but bad economics.
Adam Summers is a policy analyst at Reason Foundation.
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