The Living-wage Movement: Good Social Policy or Self-defeating?Published: November 10, 1999 in Knowledge@Wharton
This fall, the city council in Tucson, Ariz., passed an ordinance requiring any company doing business with the city to pay their workers at least $8 an hour, well above the minimum wage of $5.15 an hour.
In taking this action, Tucson became the 39th city in the U.S. to join the living-wage movement, a five-year-old initiative started by a coalition of religious, community and labor groups and based on the idea that anybody who works fulltime should be paid enough to stay above the poverty line.
While different cities have different interpretations of "enough," most mandated living wages fall between $7 an hour up to $9.50 an hour and generally apply only to firms doing business with the city. But there are exceptions. Two West coast cities, for example, are considering a minimum wage of $10.50 an hour, while proponents in New Orleans have been pushing a proposal that would require a $6.15 minimum wage for all firms in the city except government offices.
Supporters of the living-wage movement claim that today's $5.15 an hour minimum wage is not acceptable. "The national minimum wage in 1968 was $7.49 in today's dollars, or 30% higher than it is today," says Robert Pollin, founding co-director of the Political Economy Research Institute at the University of Massachusetts and co-author of a book entitled The Living Wage: Building a Fair Economy. "In 1968, if you worked fulltime at that wage, you could support a family of three at 17% above the poverty line. In 1999, if you work fulltime at the minimum wage, you are 20% below the poverty line.
"In the ongoing debate about welfare reform in this country, the point was always that people should earn their own way," Pollin says. "If that's the case then they have to be able to earn a living. This was the concept behind the minimum wage. But with the current minimum set at $5.15, someone who works fulltime for 50 weeks earns $10,300 a year. That is not adequate to support even a family of two."
Critics of the living-wage movement, however, note that requiring businesses to pay more than the minimum wage to employees will simply drive those businesses out of urban areas and/or cause layoffs of those same unskilled workers that the higher wages are designed to help. "If the minimum wage is inadequate, then that should be debated on the national level and corrected with a national policy," states Robert Inman, professor of finance and economics at Wharton. "In this world of mobile firms and households, it is ludicrous to think that cities themselves might be able to redistribute income." [Congress is currently debating proposals to boost the minimum wage to $6.15 an hour.]
What effect the living-wage movement will have depends on a number of factors, notes Janet Rothenberg Pack, professor of public policy and management at Wharton. "For example, how high is the living wage relative to the existing wage; within the industries or companies affected, are labor costs, especially unskilled labor, a small or relatively large percentage of overall costs; do companies affected by the requirements conduct business only with the city or do they have outside clients as well; how tight is the labor market; is worker productivity lower than the wage being required; and what is the elasticity between job loss and wage rates?"
The living wage sounds good, Pack adds, "but you have to consider whether it ends up 'unemploying' a lot of people, whether more people end up being hurt by the city's action than helped."
The living-wage movement is too new for any dependable studies, says Inman, but an excellent parallel is Philadelphia's wage tax, which he has analyzed extensively. [Residents of Philadelphia currently pay a 4.61% wage tax]. "Since workers have the option of living and working outside Philadelphia, firms within the city have to raise their wages to compensate for this higher tax. So in the end it's the same thing as mandating a 5% increase in wages. The consequence has been that more than half of Philadelphia's total job loss 150,000 jobs - can be attributed to the wage tax.
"The minimum wage [and the living wage] are targeted to the low end of job distribution, the semi-skilled and unskilled laborers in industries like warehousing, security, food services and transportation," Inman adds. "You increase it and those jobs are gone. Companies will leave the city. Knowledge firms, ranging from pharmaceuticals to law offices to medical practices, have a reason to locate in an urban area. Low-skilled manufacturing firms don't."
Proponents of the living-wage movement accept these concerns as "legitimate, but not significant," as Pollin puts it, "at least not at the wage levels we are talking about. The municipal living wage that has been passed in those 39 cities applies only to businesses that get contracts from the city. So number one, these businesses are voluntarily bidding on contracts, and number two, the companies that win the contracts aren't required to be in a given municipality. There is no incentive to leave a municipality or to be in one if you are trying to get the contract. You could say that the living wage requirement might mean that fewer businesses will bid on a contract. But that hasn't happened. You could also argue that these companies will just add in the extra costs to their bids. But that hasn't happened either because these extra costs are not very high relative to the total cost that businesses incur.
"These are some of the major conclusions of my research. Wage increases relative to the total costs of goods and services is about one percent of firms' total expenditure. That is on average. Of course for some firms it will be higher. Those firms will pass on some of their costs to the municipalities but again, those passthroughs will be very small relative to a city's overall budget."
Last summer Pollin analyzed the potential impact of New Orleans' $6.15 minimum wage proposal on business relocation. "My research shows that the cost to companies would be less than one percent so the incentives to relocate would be correspondingly small. And businesses can take other steps to adjust to a 1% cost increase rather than relocate. They could raise their prices 1% or they could just accept 1% less in profit. Or they could raise productivity by 1%. It's not that dramatic given that when you raise wages in the low end you get less absenteeism and less turnover. That in itself raises productivity.
"My overall point is that these wage increases are small relative to most businesses' total cost. So the adjustment mechanisms are also going to be small. It's not realistic to think these businesses will leave in droves."
The first living wage ordinance was passed in Baltimore in 1994. Firms holding service contracts with the city were required to pay a minimum of $6.10 an hour, rising to $7.70 as of July 1998. Since then living-wage laws have passed in New York, Los Angeles, Chicago, Boston, Milwaukee, Jersey City, Durham, Portland, Ore., and San Jose, to name a few. In almost all these municipalities, the laws are targeted to private firms that contract with the city. Proposals for a living wage that would have applied to all workers in a municipality, regardless of who their employer is, were defeated in Denver and Houston.
Proponents of the living-wage movement at the municipal level see their strategy as a effective tactic for fighting the trend toward "outsourcing-contracting out government services to private firms. Because private contractors pay lower wages and offer fewer benefits, outsourcing saves cities money by driving down the living standards of workers," Pollin notes in a November 23, 1998 article in the Nation magazine. "In Chicago, the outsourcing of public sector jobs from 1989 to 1995 meant income losses of between 25% and 49% for watchmen, elevator operators, cashiers, parking attendants, security guards and custodians whose jobs were privatized. Forcing private firms with city contracts to payl iving wages at least weakens the incentive for cities to achieve budget cuts on the backs of their workers."
Many of the arguments in favor of a living wage can be found in Pollin's book, in which he and colleague Stephanie Luce conduct an in-depth analysis of the cost of the Los Angeles living wage ordinance. That particular law affects employees of three types of private businesses: those holding city service contracts of more than $25,000; concessionaires on city property such as the Los Angeles Airport (LAX), and firms receiving city subsidies of more than $1 million.
"I don't support raising the minimum wage indefinitely," Pollin says. "But I am in favor of a higher minimum wage and a more equal distribution of income."