The Effects of Living Wage Laws

February 10, 2014

Living wage policies have serious unintended consequences that produce gains for certain workers only at the expense of others, says Charles Lamman of the Fraser Institute.

  • Living wage laws are similar to minimum wage laws, except that they require a much higher wage and often cover a smaller group of workers.
  • The idea is that the wage would allow workers to meet a specified living standard (in the United States, this is usually set at some measure above the federal poverty line).
  • Often, these living wage laws apply only to the employees of city contractors, whereas the minimum wage applies more broadly.
  • Today, more than 140 cities in America have living wage laws, a policy that began in the 1990s.

These types of government mandates distort the labor market, resulting in fewer jobs and hours, especially for the least-skilled workers. Employers respond to living wage laws, just as they do to minimum wage mandates, by cutting back on hours, training and jobs in general. While some workers may benefit from receiving a higher wage, others lose their jobs entirely.

  • One study found that a 100 percent increase in the living wage reduces employment for low wage workers by 12 percent to 17 percent.
  • These job losses have further consequences, as they prevent workers from gaining valuable skills and work experience that would help them move upward.
  • More qualified workers are the ones who benefit from the wage increase. This leaves the less skilled workers -- presumably, those that the policy is intended most to help -- with fewer employment opportunities.

Families in poverty are also not helped from these laws.

  • In fact, the vast majority of those who benefit from living wage laws are not poor at all.
  • One study found that 72 percent of beneficiaries in seven American cities with living wage laws were not classified as poor.
  • Over 40 percent of these workers had incomes that were twice the poverty line.

The United States' experience with the living wage demonstrates the negative impact that such laws have on employment.

Source: Charles Lammam, "The Economic Effects of Living Wage Laws," Fraser Institute, January 2014.

 

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