Fact & Fallacy: The Unintended Consequences of "Living Wages"November 23, 1999 Introduction Living wage proponents have based their case on a series of misconceptions that are assessed in this issue of Fact and Fallacy. Fallacy #1: Living wage mandates will primarily benefit adult workers who are supporting families.The goal of living wage proponents is to raise the income level of lower-wage workers. They portray lower-wage earners as adult heads of low-income families. Neither view is correct. According to Bureau of Labor Statistics (BLS) data, over half (51 percent) of all workers earning the minimum wage or below are young adults aged 16 to 24 years.2 Even more telling, 30.4 percent of workers earning the minimum wage or below are teenagers aged 16 to 19. Figure 2 displays the distribution of minimum wage workers by family relationship. It shows that individuals living with their parents make up the largest group of minimum wage earners (35.1 percent). Most of these individuals are teenagers or young adults, but the category also includes older "children" who do not live independently. In fact, family heads living with relatives accounts for less than 25 percent of minimum wage workers.3 The lack of full-time, steady work opportunities, not low hourly wage rates, are at the core of poor families' low incomes.4 Few minimum wage earners are members of low-income families. At the time of the 1990 federal minimum wage increase, only 22 percent of affected workers lived in families with incomes below the poverty threshold. Most affected workers (53 percent) were actually living in families with incomes at least twice the poverty threshold.5 Thus, raising wage rates seems to be an inefficient way to raise the income level of poorer families. Fallacy #2: Living wages are needed because an individual working full-time at the federal minimum wage still falls below the poverty line.Living wage advocates calculate the earnings of a minimum wage worker by simply multiplying the federal minimum wage ($5.15) by full-time work hours (2,000) to estimate an annual income of $10,300. This is indeed below the U.S. Census Bureau's poverty threshold for a family of four6, but this comparison is misleading because it is based on unrealistic assumptions. First, it presumes that there is only one worker in a family. If a family consists of even two minimum wage earners, their before-tax income rises to $20,600, well above the poverty threshold for a family of two ($10,972 if under 65). It is also sufficient to put a family with up to three other persons above the poverty threshold. These income calculations are based on a 40-hour work week and do not include potential overtime earnings, at 150 percent of base salary, or the possibility of additional jobs (minimum wage or otherwise). If each adult in a four-person family works an additional 5 hours per week, family income increases by $3,862 to $24,462, which is 64 percent of U.S. median family income for 1997-1998.7 Second, federal transfer programs, including food stamps, the Earned Income Tax Credit (EITC), housing subsidies, and school lunch programs, add significantly to the effective disposable income and living standards of lower-wage workers. Employer provided benefits are also received by approximately 52 percent of individuals earning a full-time minimum wage income.8 Figure 3 on the next page shows our estimates of the effective disposable income of various single minimum wage earner families once subsidies and expected employer benefits9 are included. When these are taken into account, families of up to four (including both single and dual-adult families) with only one minimum wage earner are raised above the poverty threshold. For example, a nuclear family with two children and only one minimum wage earner makes $22,356 after EITC, food stamps, child care deductions, housing subsidies, and expected employer benefits are taken into account. Fallacy #3: Living wages will not cost jobs.Living wage proponents deny that higher wage floors reduce employment.10 Repeated studies have shown significant employment losses associated with increases in the federal minimum wage. For example, a 1998 study by Burkhauser, Couch, and Wittenberg found that raising the minimum wage reduces employment among teenagers and young adults, with a 10 percent increase in the minimum wage leading to employment losses of 1.3 percent.11 Likewise, they found that a 10 percent increase in the minimum wage causes employment losses of 0.9 percent among adults aged 25 to 61. A 1992 study by Neumark and Wascher observed similar disemployment effects for teenage employment, and found that overall employment decreased 1.5 to 2 percent with a 10 percent increase in the minimum wage.12 The greatest negative impact falls on workers with the lowest levels of education and skills. Furthermore, these studies examined mandated federal minimum wage increases, not local living wage increases. Even the most recent proposed minimum wage increase is only one-fifth the size of some living wage increases. Hence, even small disemployment effects at the national level are magnified by the size of local living wage increases. For example, using the conservative Burkhauser, Couch, and Wittenberg results, doubling the minimum wage would lead to employment decreases of 9.2 percent among adults and 14.7 percent among teenagers. Fallacy #4: Living wages will not cause businesses to relocate.Living wage proponents believe that the "majority of low wage workers are employed in industries that are tied to their locations,"13 such as food, transportation, or janitorial services that must be located near their customers in a central location, such as a city, to operate profitably. For this reason, they believe that the relocation consequences of living wages are minimal. However, even under these circumstances businesses may still close. Higher wage mandates will raise customer costs, as with taxes for government services. These customers may themselves relocate to areas where costs are lower, thereby decreasing employment opportunities for lower-wage individuals. Also, firms with low profit margins may abandon their businesses if labor costs inhibit their ability to operate profitably. The assistant vice president for the Prince George's County Chamber of Commerce, Robert M. Zinsmeister, expressed concern about precisely these effects in a recent interview.14 He stated that several businesses are already uneasy about Prince George's County's proposed living wage ordinance and are considering relocation. Without job growth, a municipality cannot sustain a growing population. In fact, Mr. Zinsmeister also notes that some businesses are already reconsidering their decision to open operations in Prince George's County.15 Hence, these well-intentioned plans could start a cycle of economic stagnation or fuel already existing deterioration. ConclusionMandating living wages is not the most effective way to help low-wage workers. Other strategies are more effective and will cause fewer adverse consequences. For example, the Earned Income Tax Credit (EITC) is a better-targeted and more effective way of improving the earnings of low-wage working individuals and families, because it provides an income subsidy for these families. The EITC rewards work, rather than serving as a barrier to work, as is the case with a high living wage. In fact, a highly contentious debate over a living wage bill in Montgomery County, Maryland was recently defused when the county council voted unanimously to approve the nation's first local version of the EITC, providing credits of $176 to households with incomes below $17,000 per year. This figure will increase to $332 over the next two years.16 Elimination of the current family bias in the federal EITC could improve its effectiveness by lifting all individuals working nearly full-time, year-round out of poverty, regardless of their family status. Reducing or refunding a portion of payroll taxes for low-wage workers also provides an effective wage improvement strategy. Living wage proposals are poorly focused and may actually hurt the intended beneficiaries. Job losses will fall most heavily on those with the lowest skill and education levels and only a fraction of the benefits will accrue to the intended recipients-low-income families. This is because living wage proposals focus on lower-wage earners, of whom the largest group is youth still living with relatives. Many lower-wage workers lack education and job skills. Over 40 percent of minimum wage workers have less than a high school education, a much higher share than can be accounted for by their age distribution.17 As the returns to education and skills continue to grow, those with few marketable skills will face increasing difficulties. Rather than adopting living wage mandates that will likely further limit these individuals' job opportunities, measures designed to improve their workplace skills may ultimately be more effective. Finally, living wage ordinances should be seen, not as a means of helping the poor, but as a "tool for union organizing."18 Many ordinances require contracting employers to be neutral in union organizing campaigns and to recognize unions based on card checks. Notes 1 Proposals in the House of Representatives and the Senate would raise the federal minimum wage to $6.15 over three years. 2 Bureau of National Affairs, Daily Labor Report, August 10, 1999: D-1-D-11. 3 It is important to note that there may be other wage earners in a family. 4 Richard V. Burkhauser, Kenneth A. Couch, and David Wittenberg. 1998. "The Behavioral and Redistribution Consequences of Minimum Wage Hikes: Evidence from the 1990s," Mimeo, Center for Policy Research, Syracuse University: p.4. 5 Ibid, Table 4. 6 For two adults and two children, the threshold is $16,530. See http://www.census.gov/hhs/poverty/threshld/thresh98.html. 7 Two-year moving average, U.S. Census Bureau estimates, Table D, U.S. Census Bureau, CPS, 1996-98. 8 Employee Benefit Research Institute, EBRI Databook on Employee Benefits, Third Edition (1995): p.260. 9 Ibid, p.26 and 260. Expected benefits were calculated using 52.3 percent of yearly employer benefits. Note: supplemental pay and paid leave were not included. 10 A series of studies by David Card, Lawrence Katz, and Alan B. Kreuger support this assertion. However, studies by David Neumark and William Wascher have questioned both their methodology and their results. Many other studies also contradict their results. See the EPF Backgrounder "Minimum Wage: Broken Icon of Employment Policy" pp.10-23 for more detailed information on empirical research. 11 Burkhauser, Couch, and Wittenberg: p.7. 12 David Neumark and William Wascher, "Employment Effects of Minimum and Subminimum Wage: Panel Data on State Minimum Wage Laws," Industrial and Labor Relations Review 46, no.1 (October 1992): 55-81. 13 Association of Community Organizations for Reform Now (ACORN), Responses to Common Anti-Living Wage Arguments, March 1999, http://www.livingwagecampaign.org/responses-to-common-anti-lwage-arguments.html: 2. 14 Yuki Noguchi, "Working for a Living Wage," The Washington Post, News Update, Oct. 4, 1999: pp19-20. 15 Ibid, p.19. 16 Scott Wilson, "Montgomery Approves Income Tax Credit," The Washington Post, October 19, 1999: http://washingtonpost.com/wp-srv/local/daily/oct99/pmmoco19.htm. 17 Bureau of National Affairs, Daily Labor Report, August 10, 1999: D-6. 18 Madeline Janice-Aparicio, Director Los Angeles Living Wage Coalition in Robert Pollin and Stephanie Luce, The Living Wage: Building a Fair Economy, The New Press, NY, 1998: p.8.
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