Fact & Fallacy: The Unintended Consequences of "Living
November 23, 1999
Arguing that the federal minimum wage is inadequate to
help the working poor, community groups and unions across the country
are promoting municipal "living wage" ordinances that mandate pay levels
substantially above the federal minimum wage rate. The movement began
in 1994 when Baltimore passed the first living wage ordinance, but precursors
date as early as 1989. Currently, 40 municipalities (cities, counties,
and school districts) have passed living wage policies and many more have
campaigns under way or proposals on the table. (See insert.) Specific features vary from ordinance
to ordinance and proposal to proposal, but typical ordinances cover employees
of local government contractors and/or businesses receiving financial
assistance from the local government. Figure 1 summarizes coverage,
exemptions, and additional features found in living wage plans. Living
wage proponents advocate wages ranging from 20 to 100 percent or more
above the current federal minimum wage of $5.15.1 With wage floors significantly higher than the national
minimum wage, there are significant adverse effects of local living wage
ordinances. These adverse consequences are compounded by their application
only within the designated local area, shifting economic growth to outlying
areas. Perhaps the most severe consequence is that living wages may not
help the intended beneficiaries and may actually worsen their situations.
Other policies are available that would more directly and less expensively
help workers and their families improve their living standards.
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
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
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
Mandating living wages is not the most effective way to help
low-wage workers. Other strategies are more effective and will cause fewer
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
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.
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
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:
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:
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