NCPA - National Center for Policy Analysis


October 24, 2005

"Living wage" laws requiring employers to pay more than the minimum wage do little to improve the standard of living for low-income families, say economists Aaron Yelowitz of the University of Kentucky and Richard Toikka of the Lewin Group.

Yelowitz and Toikka used government data to determine the effect of those ordinances on earnings, income and government assistance levels. Unlike many studies focusing on poverty levels, the authors examined total income - cash income and benefits - to determine the full effect on standard of living.

For example:

  • A family with two children can qualify for more than $4,000 in tax-free cash assistance through the Earned Income Tax Credit (and even more in states with supplemental state-run EITC programs); a benefit of this size would clearly affect the quality of life for low-income families.
  • As earnings increase, recipients see benefits from these programs decrease dramatically; the marginal tax rate in the phase-out range for the EITC can reach as high as 21.06 percent, and the rate for food stamps is generally 30 percent.

Failing to include the loss of these benefits when evaluating the benefit of living wage ordinances can dramatically inflate the perceived effectiveness. Specifically, the authors found:

  • Enactment of a living wage ordinance decreased benefits assistance by $34 per month, while increasing earnings by $16 per month.
  • For every dollar in increased earnings from a living wage ordinance, families can expect to lose up to $2.12 in benefits assistance, greatly limiting the ability of the wage policy to help low-income families.

Yelowitz and Toikka say the limited benefit they found should be weighed against the decades of research clearly showing mandated wage floors create disemployment effects ? particularly for the low-skilled employees these laws are intended to help.

Source: Craig Garthwaite, "'Living Wage' Laws Don't Help Low-Income Families," Heartland Institute, Budget and Tax News, Vol. 3, No. 8, September 2005.

For Yelowitz and Toikka study: Aaron Yelowitz and Richard Toikka, "Effective Tax Rates and the Living Wage," Employment Policies Institute, May 2005.

For text of study:


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