The Hidden Dangers of the "Living Wage"

January 5, 2012

With 2012 upon us, the next labor market battle will be over the "living wage."  Long backed by both unions and progressive groups, the living wage law looks like a good-old fashioned minimum wage law, with this critical twist: the living wage law is targeted at only those individuals who work in projects that receive some sort of government subsidy.  The rationale here is that, if hundreds of millions of dollars of taxpayer money will go to private developers to subsidize their projects, the money should be given with conditions to protect workers from exploitation, says Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution.

  • For example, New York City's Fair Wages for New Yorkers Act would provide two wage increase options to private businesses that receive at least $1 million in subsidies for a given project: either pay workers $10 per hour in wages plus benefits, or pay them $11.50 per hour without benefits.
  • This amounts to a wage boost of 58 percent for workers, and this is relatively in line with living wage stipulations in other jurisdictions.

The problems with a living wage increase are numerous and their associated costs are substantial.  First, the reform hurts the very population that it seeks to help -- a lesson that can be seen in a similar situation of the increase in the minimum wage from $5.15 to $7.25.  Prior to the increase, 6.6 million Americans were paid below $7.25 per hour.  With the sudden increase, unemployment spiked as businesses responded to the significant additional cost of employing low-wage workers.  Thus, while the increase in the minimum wage helped some workers, this was only at the expense of their colleagues.  In the same way, a living wage will help some low-wage workers while bringing unemployment for others.

Additionally, the living wage regulation is much more pervasive and broad than its advocates would suggest.  Though they point to examples such as the construction of sports stadiums that were subsidized by the government, numerous small businesses could also fall under the umbrella of its broad rules.  This creates an economic cost in terms of increased costs of compliance.

Finally, when they find out that their construction project will be subject to the living wage, many businesses will drop the project altogether, as happened with a proposed shopping mall in the Bronx.  Many businesses cannot afford the additional expense of complying with a living wage.

Source: Richard A. Epstein, "The Hidden Dangers of the 'Living Wage,'" Defining Ideas, January 3, 2012.

For text:

http://www.hoover.org/publications/defining-ideas/article/103636

 

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