How the Living Wage Kills Jobs
With 2012 upon us, the next labor market battle, both in the United States and in Europe, will be over the “living wage,” a topic that I take up in my column this week for the Hoover journal, Defining Ideas.
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 minimum wage law, which is presently at $7.25 (up from $5.15 in 2006) applies to a wide range of workers in the public and private sector. In contrast, the living wage law is targeted only to those individuals who work in projects that receive some sort of government subsidy. As the New York Times put the point in an impassioned editorial last December, the case for The Fair Wages for New Yorkers Act rests on the simple proposition that a city that doles out “hundreds of millions of dollars a year to private developers” should be in a position to ask them to pay decent wages to the workers whose jobs these subsidies created.
The Fair Wages proposal, which is now before the New York City Council, attempts to do just that. If passed, it would impose one of two living wage requirements on employers who receive $1 million or more in discretionary financial assistance from New York City. Either pay workers $10-per-hour in wages plus benefits, or pay them $11.50-per-hour without benefits. That works out to a wage boost of 58 percent for workers in that category.
But the imposition of a high minimum living wage will reduce, all other things being equal, the demand for labor. Consider the case of the Related Corporation, one of New York’s most innovative real estate developers, which sought to develop a 575,000 square foot shopping mall in the Bronx. The company was prepared to pour some $310 million into the job-creating project. But the New York City Council voted the proposal down because Related would not cave on the living wage requirements. No developer has come forward to take the deal that Related turned down.
How many more jobs will the living wage kill? Continue reading the rest of my column over at Defining Ideas.
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Jun '10
Re: How the Living Wage Kills Jobs
Yup, it's hard to make people taller by cutting off the bottom rungs of every ladder.
Oct '10
Re: How the Living Wage Kills Jobs
Davis-Bacon writ large, which will have the same effect, writ large. The elimination of opportunity for those at the bottom, and an insurance policy for the top tiers of labor.
"Young people and blacks need not apply."
May '11
Re: How the Living Wage Kills Jobs
<Supposition> I am a person currently working for $7.25/ hr. and subject to the "living wage" concept.
Why am I not extremely angry at those who would propose to raise my pay to $11.50/hr? At $11.50 I am still poor. I am still struggling. Whereas at $35.00/hr or $70.00/hr I would be in great shape. The people proposing only $11.50 don't have my interests at heart, they are simply posturing. They need to get with it and "really" raise the bar to where I can have a true "living wage". I mean if they can legislate $11.50/hr they can just as easily legislate $70.00/hr. What's holding them back?
</Supposition> (end supposition)
Therein is the true lie behind any attempt at mandating any wage. It is not about the wage earner but about the politician buying votes.
Jun '10
Re: How the Living Wage Kills Jobs
In practice the "living wage" truncates the top rungs, too. If you are an employer with a fixed cost for labor, how do you raise wages at the bottom without raising prices to your customers? You can freeze the wages at the top for your most skilled workers, even fire a few and replace them altogether. The quality of your services will deteriorate, but your labor cost will remain fixed. The "living wage" has the effect of flattening wages across the board. Middle class professionals suffer, too! So how do you like that equality of outcome now?
Dec '11
Re: How the Living Wage Kills Jobs
The "best" motive that those who promote minimum wage laws can have is to avoid exploitation of workers by prohibiting negative auctions for wages. The theory being that the maximization of profit necessarily drives wages to near zero if labor is in super abundance. This makes labor slave to capital.
But like most economic arguments this is meaningful only if all other economic factors are presumed to be unaffected by lower labor rates. There is nothing unjust about deflation any more than there is something just about inflation. It is the arbitrary control of any wage or price that generates "unjust" outcomes. It is of no consequence to anyone if their wages drop if their living expenses drop to reflect a general adjustment to current economic conditions.
And when labor rates are permitted to reflect their true economic value, it becomes much clearer to the individual laborer about what they must and can do to increase their economic value. When labor rates are arbitrary (for that is what a minimum wage is) mobility is decreased and opportunity contracts.
May '10
Re: How the Living Wage Kills Jobs
Many union contracts are tied to minimum wage. So as the minimum wage rises, as it just did in San Francisco this week 3.2% to $10.24, it means that hosts of union wages rise proportionately. This is, of course, in addition to the 1.5% payroll tax, mandatory health care benefits ranging between $1.37-$1.46 for business between 20-99 employees and $2.06-$2.20/hour for those with more than 99 employees and nine paid sick days per year. Behold the future.
Nov '10
Re: How the Living Wage Kills Jobs
Well, Canada's minimum wage is now pretty much $10.00/hr. Like gay marriage, I think you'll survive it...
But more seriously, suppose (for the sake of argument) one gets rid of support for the poor in general (welfare,the minimum wage, etc.), and considers the impact on urban areas in particular. Rural areas have a much higher level of social support - i.e. neighborliness - so the impact is not so severe, The result would be something like the 19thC working conditions, with high violent crime, high rates of alcoholism, and very high rates of prostitution. A figure of about one prostitute for every 10 men is pretty common in late 19thC urban social statistics. These generate a great deal of political instability. How do you deal with that? Especially now that growth in general seems to be flattening out.
As far as I can see most of these social programs are motivated as much by a desire to maintain social peace as anything else. Too much, you go broke, too little, society falls apart.
Edited on Jan 3 at 9:17amOct '10
Re: How the Living Wage Kills Jobs
So basically, politicians are trying to avoid the inflationary and unemployment consequences of high minimum wages by only applying the "living wage" to well-connected, privileged, aristocratic public workers?
How exactly does that help anyone who isn't working in the public sector? The sheer corruption of it is mind-boggling.
Oct '10
Re: How the Living Wage Kills Jobs
You also have a higher natural rate of unemployment than we do (the non-accelerating-inflation-rate-of-unemployment, or NAIRU). I much prefer our (hopefully still) 5.5% to your 6.5-9.5% (see this IMF article). Structural unemployment does matter, even if most of the developed world has sickeningly bought off their unemployed so an over-privileged permanent employment class can maintain their unsustainable level of privilege.
Oct '10
Re: How the Living Wage Kills Jobs
Joseph Eagar
You also have a higher natural rate of unemployment than we do (the non-accelerating-inflation-rate-of-unemployment, or NAIRU). I much prefer our (hopefully still) 5.5% to your 6.5-9.5% (see this IMF article). Structural unemployment does matter, even if most of the developed world has sickeningly bought off their unemployed so an over-privileged permanent employment class can maintain their unsustainable level of privilege. · Jan 3 at 12:58pm
Not that Canada falls completely in that camp; you Canadians have been steadily reducing structural unemployment since the 90s. Your not in the same league as Spain or Italy.
Jul '11
Re: How the Living Wage Kills Jobs
From the grave I hear Ted kennedy's cirrhotic words," We're gonna raise it and raise it and raise it".
Nov '10
Re: How the Living Wage Kills Jobs
Joseph - sure, no doubt Canada has lots of issues, and there's lots of interesting comparisons that can be drawn between Canada & the US. But that wasn't really my point (and my apologies for not making it clearer).
The point I was trying to make is that over the last two centuries there's a pretty big body of evidence pointing out that a certain amount of social spending of various types is necessary to maintain social peace. What the precise optimal level to spend is really not calculable, it's more a process of continual trial and error. However the discussion has to go further than theoretical arguments based on economics, or economic morality, alone. If conservatives don't engage in that discussion, they are going to be left at the starting gate.
FWIW, I personally like looking at information from 19thC France for crude parallels, because it is heavily documented, and in many ways is much more similar to the current US than (say) the 19thC US was. But mileage may vary. If you are interested, a good book is Paris, Capital of Modernity (I think I've recommended it before).
Oct '10
Re: How the Living Wage Kills Jobs
HalifaxCB:
The point I was trying to make is that over the last two centuries there's a pretty big body of evidence pointing out that a certain amount of social spending of various types is necessary to maintain social peace.
Oh. I agree with that, though I also think there are serious issues that have to be studied (which happens to be a hobby of mine) related to perverse capital flows (a fascinating if highly technical topic).
Keep in mind that the level of necessary social spending varies with the structural unemployment rate. Thus the U.S., with it's lower structural rate, requires less spending over the business cycle then most other countries, including Canada.
Jun '11
Re: How the Living Wage Kills Jobs
HalifaxCB: As far as I can see most of these social programs are motivated as much by a desire to maintain social peace as anything else. Too much, you go broke, too little, society falls apart. · Jan 3 at 8:36am
It is certainly true that one has to make trade offs economic efficiency, narrowly understood, and the preservation of social peace. However, in making this trade off it is important to focus not only on the relative value of these goods but also the differential effectiveness of various approaches. That is to paraphrase Professor Epstein said there are smart ways to do transfers and dumb ways. I tend to think the economic reasoning provides a good reason to believe that minimum or living wages are inferior to other methods (i.e. negative income taxes, food stamps, welfare). Additionally, if the types of social disorder one is concerned about is crime, one needs to consider the relative costs and benefits of increase resources to combat those effects directly through better policing and tougher criminal penalties. In the end then, I think the more interesting questions in some ways are not how much to spend, but how and on what.