NCPA - National Center for Policy Analysis

The Ineffectiveness Of Living Wage Regulations

December 1, 1999

American cities are enacting "living wage" ordinances at the rate of about one per month, according to the New York Times. Such ordinances -- requiring city contractors to pay wages well above the minimum wage -- now exist in Detroit, Baltimore, Los Angeles, Chicago, New York and other major cities.

Labor unions support living wage laws to gain pay raises for their members they cannot achieve through traditional bargaining or strikes. Such ordinances also reduce competition from non-union companies and discourage cities from privatizing public services. After all, if private contractors must pay wages as high as those currently paid to municipal employees, there are unlikely to be any cost savings from contracting-out or privatization.

A new study of the Detroit living wage by Michigan State University economists David Neumark and Scott Adams notes that there is no requirement that city contractors hire only Detroit residents. Hence, to the extent that the legislation raises wages, the beneficiaries may well be people living outside the city. Thus the citizens of Detroit are taxing themselves more for city contracts that benefit people who do not even live in Detroit.

Neumark and Adams also calculate the effect of higher unemployment from forcing companies to raise their wage rates. This loss of jobs for low wage workers largely offsets the benefit of higher wages so that aggregate benefits for those in poverty are canceled out. A similar conclusion was reached in a study of the San Francisco living wage by the Federal Reserve Bank of San Francisco.

Now even liberal groups are starting to recognize that living wages laws are fundamentally ill-conceived. As the Democratic Leadership Council says, such laws "don't make economic sense."

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 1, 1999.

 

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