Living-Wage Movement Impedes ProgressCommentary by Pete du Pont
January 29, 1999
A living-wage statute requires contractors doing business with a city to pay employees a minimum hourly wage well above the minimums required by state or federal law. San Jose, California, recently joined 20 other cities in "super-minimums" by mandating minimum pay of $10.75 an hour if no benefits are paid, the highest in the nation.
It seems almost superfluous to point out the economic flaws in this price-fixing scheme. As labor economist Finis Welch said, the idea that everyone should get a decent wage is as appealing as the idea that everything good should be cheap. If $10.75 is a good wage, isn't $21.50 twice as good? If the goal is to raise wages, why not a $30.00 living wage? Political price-fixing reverses cause and effect. Low prices, of course, are not the cause of an abundant supply of goods; low prices are a result of productive economic activity. Similarly, forced wage hikes do not cause economic success; high wages are a pleasant consequence of productive success. In business, people are rewarded in accord with their ability to satisfy customers. Fixing prices at levels they would not otherwise be causes nothing but trouble. It's the road to poverty, not plenty.
The living wage makes little economic sense, but it makes political sense. As Voltaire said, "In general, the art of government consists in taking as much money as possible from one class of citizens to give to the other." Apparently, taking money from city taxpayers and giving some of it to selected contractors and any low-wage workers kept on the payroll is good politics.
Baltimore passed the first living-wage ordinance in 1994 and it's been the model for other cities. Baltimore has been the subject of the most detailed study of the economic impact of living-wage ordinances. Conducted by a group called the Preamble Center for Public Policy, its most controversial finding was that the real cost of city contracts actually fell after enactment of the law.
That's surprising. It would be contrary to economic theory, since labor is the largest cost for business and any major increase in labor prices without an offsetting gain in productivity must ultimately raise prices. The theory isn't wrong, however, because the data were "cooked." An employer-backed group called the Employment Policies Institute in Washington found that many of the figures do not match those in Baltimore's official reports and that in the most significant case, the data were fabricated. One more case of lies, damned lies and statistics.
Data aside, the whole scheme is goofy. It resembles George McGovern's "$1,000 for everybody" back in the 1972 presidential race. But the urban left is trying to convince us that fleecing more money out of city taxpayers to reward politically connected contractors who pay at least $10 an hour is "good government." Rather than finding economical ways to do things, governments find more expensive ways. After all, we taxpayers have bottomless purses, don't we?
Can government legislate against economic reality? Yes, but it always must fail. Entrepreneurs, on the other hand, cannot ignore market realities, especially the productive value that different workers bring to the table. The real problem for low-wage workers is the lack of productivity and skills that a better education might have given them. The First International Adult Literacy Survey recently found that 24 percent of American adults are at the lowest level of literacy -- lower than the level required to fill out a job application or write out a receipt. Many are products of poor government school systems.
Government policies which reduce job and training opportunities in the marketplace are an obstacle to unskilled workers' progress, not a solution. Firms hire and retain only those employees who add at least as much to revenue as they cost. Workers, like all business suppliers, must earn their way. No amount of good government talk and political intervention or subsidies can cover up this reality. Living wages may be the current fad, but in the end they will hurt the very people they are supposed to help, and they will be discarded as another bad idea.
The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues.