The Living Wage

Why a Living Wage?

A living wage can be defined as the wage required to keep a family above the poverty line. The main idea behind the living wage concept is to provide workers with a level of income that would allow for an acceptable standard of living. This would include being able to afford food, healthcare, housing, utilities and some degree of recreation.

According to the Association of Community Organizations for Reform Now (ACORN) "Living wages reward hard work and provide enough income for families to live on."

A living wage ordinance requires employers to pay wages that are above federal or state minimum wage levels. Only a specific set of workers are covered by living wage ordinances, usually workers employed by businesses that have a contract with a city or county government or those who receive economic development subsidies from the locality. The rationale behind the ordinance is that city and county governments should not contract with or subsidize employers who pay poverty-level wages.

Source: Economic Policy Institute

How is the minium wage different from a living wage?

The federal minimum wage is the minimum amount that a worker can be paid an hour (currently $5.15) and applies to almost all workers. States may also set a minimum wage that is higher than the federal minimum. Living wages commonly refer to wages set by local ordinances that cover a specific set of workers, usually government workers or workers hired by businesses that have received a government contract or subsidy. A "living wage" is a also term often used by advocates to point out that the federal minimum wage is not high enough to support a family.

Source: Economic Policy Institute

Why do we need living wage ordinances?

The main reason for enacting a living wage ordinance is to reverse the downward trend in wages for low-wage earners. Wages for the lowest-paid 10% of workers fell 9.3% between 1979 and 1999. The number of jobs in which wages were below what a worker would need to support a family of four above the poverty line also grew between 1979 and 1999. In 1999, 26.8% of the workforce earned poverty-level wages, an increase from 23.7% in 1979.

Living wage ordinances are necessary to prevent city and county governments from encouraging the creation of jobs that pay wages so low that workers live in poverty. Without living wage laws, governments could contribute to the creation of poverty-level jobs by hiring low-paying sub-contractors or giving businesses tax breaks or subsidies to create jobs without any guarantee that the new jobs will pay a decent wage.

Source: Economic Policy Institute

Who pays the cost of a living wage increase?

The evidence from living wage evaluations indicates that the costs of living wage ordinances are primarily absorbed by businesses through reduced training and recruitment costs or reduced profits. The evaluations found no evidence of job loss, and the contract costs increased by an insignificant amount.

However, in addition to the cost of wage increases for workers, there are also administrative costs associated with living wage ordinances. One evaluation of the Baltimore living wage ordinance found that that administrative costs amounted to $0.17 per taxpayer per year.

Even if some costs from a living wage ordinance are passed on to the taxpayers, it is a value judgement on the part of the community as to whether reducing poverty through a living wage ordinance is worth the added expense. While the living wage might increase the amount of money the locality spends on contracts, local governments might also experience savings as families become less reliant on income supports and social services.

Source: Economic Policy Institute

Living Wages & Capital Flight

Some living wage detractors argue that the living wage will create a "hostile business climate." But most living wage ordinances cover too small a portion of the labor force to have such a profound effect; most living wage ordinances cover less than 1% of the local workforce. Wages are only one factor in a business' decision to move to a location, and there is no evidence that an existing living wage ordinance has discouraged firms from locating in a city.

In addition, the costs of the living wage ordinance will have a very small impact on the profits of the small number of firms affected by the law. The profit margins for firms effected by the living wage are estimated to range from 10-20% of production costs. In comparison, the wage increases from living wage ordinances are estimated to be 2% of production costs.

Source: Economic Policy Institute

What effect do Living Wage ordinances have on economic development?

Living wage ordinances have the potential to counteract the destructive race to the bottom wherein cities and counties try to attract businesses by offering larger subsidies than their neighbors. The more prevalent living wage ordinances are, the less firms will be able to shop around for the cheapest locality on the basis of cutting wages.

Recent research focusing on the number and quality (in terms of wages and benefits) of jobs created by tax incentives has found that many economic development subsidies are not tied to job quality. A study of tax incentives in Minnesota by the Good Jobs First project found that 72% of subsidized jobs paid below the average for their corresponding industry. Living wage ordinances are one tool to ensure that economic development policies create good paying jobs.

Source: Economic Policy Institute

Will Living Wage ordinances reduce poverty?

Some critics argue that living wage ordinances will not reduce poverty because most living wage workers do not live in poor households. Evidence from EPI's evaluation of the Baltimore living wage ordinance shows that this claim is not true. Interviews with a small sample of workers covered by the living wage reveal that the average household income for covered workers was $13,632. The interviews also show how important a living wage worker's wages are to their family's well-being: an overwhelming majority of the workers interviewed were the primary wage earner in their household, bringing home an average of 68% of their family's income.

Another frequent claim is that most living wage workers are teenagers. However, studies of the minimum wage show that 70% of minimum wage workers are adults. The proportion of adults is probably higher among living wage workers, since living wage ordinances cover jobs typically held by adults, like janitors and bus aids.

Local governments often have many effective initiatives to address working poverty, while at the same time they create poverty-wage jobs through their contracting policies. Living wage ordinances are designed to make sure governments are not creating poverty through their employment practices. However, it is also important to keep in mind that while the living wage is a crucial tool in the effort to end poverty, it is only one part of a larger anti-poverty strategy.

Source: Economic Policy Institute

Will they replace less-skilled workers with higher skilled workers if wages are raised?

Research on the minimum wage suggests that living wage ordinances will not cause job loss among less-skilled workers. A recent EPI study of the effects of the 1996-97 minimum wage increase, for example, found no evidence of job loss among teenagers and adult workers with less than a high-school education (two groups of workers that typically have lower skill levels) (Bernstein and Schmitt 1998).

In the absence of living and minimum wage laws, firms can choose either the "low road" (low pay, low training, low motivation, high turnover, and high vacancies) or the "high road" (higher pay, more training, greater motivation, lower turnover, and fewer vacancies). Almost every industry includes profitable businesses that follow both paths.

High-road employers, who would rather have a stable workforce and produce a high-quality product, have to compete for contracts with low-road employers, who provide a poorer-quality product at a lower cost. Living wage ordinances encourage businesses to take the high road, leading to higher quality services for the public and a more highly trained workforce.

Opponents of living wages have provided no evidence that the transition from low-road to high-road employment will lower employment opportunities for less-skilled workers. The evidence suggests that employers typically make the transition by retaining, training, and motivating their existing workforces.

Source: Economic Policy Institute

History of the Living Wage

During the Industrial Revolution, workers did not want to live in a wage-labor society. They compared wage labor to slavery. Rather, they were accustomed to a system called independent production in which craftsmen worked for themselves and took apprentices. As a result, during the early nineteenth century, workers hoped to own their own means of production rather than being the paid employees of others. Even workers who felt that wage labor was socially acceptable saw it merely as a temporary step on the road to self-employment.

Critics of the wage system asserted that wages did not provide a 'just return for labor.' They took both producerist and consumerist manners of thinking about labor. The producerist argument believed that the value of what workers created was more than what they earned in wages, and that the remainder was stolen from them. This is akin to the views of Karl Marx. In comparison, consumerists were concerned that wages could be set too low, in a way that would be unable to provide workers with a comfortable lifestyle. Before the Civil War, the producerist argument was supported by the majority of the nation.

Between the Civil War and World War I, businesses rapidly consolidated and were assisted by the government, leaving little alternative to wage labor. Because wage labor was so much more common, workers had much less power to avoid it. Although common citizens realized that there was little alternative to earning a wage, they nonetheless resisted the notion that wages should be fixed and were to be set in stone by employers. By moving from a producerist to a consumerist mentality, workers began to share the belief that wage labor was a liberation from rather than a form of slavery.

Ira Steward – Wage labor societies have no predetermined meaning. People could be either wage slaves or "proud citizen workers earning living wages”. George Gunton – Wages are simply a part of social progress, not a way for those in power to continue the system of slavery.

Consumerist labor leaders had a common theme in their advocacy of wage labor – the idea that wage earners should be earning what they called ‘A Living Wage'. The debate that had formerly compared wages to slavery was ending, while the comparison of poverty to slavery continued. Although there were a variety of arguments put forth, the general consensus was that wages should be enough to give workers relatively the same standard of living as independent proprietorship did before the Civil War.

Samuel Gompers (AFL president) (1898) – The Living Wage should be enough for a normal sized family to live in a rational manner that is self-respecting and maintains physical and mental health.

The individuals advocating the Living Wage countered the wage-slavery metaphor by equating high wages with freedom, independence, and citizenship. Additionally, they used prostitution as a metaphor for low wages. This meant that both prostitutes and low-wage workers were degraded and demoralized, but living wages represented harmony between economic activity and gender roles.

The battle for the living wage has traditionally been fought on the municipal level rather than the state or national level. This is because the monetary and political lobbying businesses can execute carries much less of an advantage on the local, small-scale level. The first victory for the living wage movement occurred in Baltimore in 1994. Starting in 1996, $6.10/hour became the lowest wage firms holding municipal service contracts could pay their workers. The ordinance also specified that the minimum wage would rise to $7.70/hour by 1999, and must afterwards remain consistent in terms of inflation.

Due to the success of the system promoted in Baltimore, multiple other victories were won in the following years. Only three years later, twelve cities including New York, Los Angeles, Boston, Milwaukee, and Portland adopted the living wage system. Current movements include those of Philadelphia and Denver. Although the specifics vary from city to city, the general idea is that private firms wishing to be considered for government contracts must pay their workers more than the national minimum wage.

While increasing to the minimum wage to a level above the poverty line is the driving force behind the living wage philosophy, the movement also is dedicated to maintaining or even improving the wages of all workers, vitalizing the labor movement, and reducing the amount of tax reductions given to business by the government.

(Reference: Pollin and Luce Chapter 2)

What is the cost of a living wage?

Critics believe that Living Wage laws create out-of-market wages, sometimes for less-skilled workers. In return this also raises the amount that highly skilled workers expect to earn. Contractors need to make up for these costs somehow either by laying people off or kicking back the costs to the government and/or consumers. In some cases the wage increases can be simply absorbed by the company, but that is not always the case.

Many economists that are in opposition of a Living Wage ordinance argue that the cost of a living wage will be higher unemployment. They believe, as stated above, that in order to maintain profits, companies must find other ways to absorb the cost of the higher wages that they now must pay. They do so by reducing benefits, increasing unemployment and sometimes by raising prices - which ends up harming the consumer.

Issues

The following are some of the key arguments that economists make both for and against the Living Wage.

Poverty

Pro

- Minimum wage laws are effective at targeting their intended recipients. This is backed by empiricals studies (Pollin and Luce p. 30)

Con

- Real wages will continue to decrease over time, limiting the effectiveness of a minimum wage.

Employment

Pro

-There is an argument against the living wage campaign asserting that it would increase unemployment and hurt its intended beneficiaries. They would unintentionally price themselves out of the labor market and destroy their own job opportunities. However, Figure 2.2 shows that this argument does not hold. Rather, there is a very slight trend showing the opposite, that unemployment actually decreases correlating with increases to the minimum wage. However, due to the heavy scatter of the data points, it is much safer to simply say that there is no relationship between unemployment and the minimum wage.

-Although there is no relationship between minimum wage rates and unemployment in the overall economy, only 8.9% of Americans are recipients of the minimum wage. The argument is thus made that...

Con

Productivity

Pro

Con

Privatization

Pro

Con

Our Conclusions