Strengthening Constitutional Self-Government

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The living wage: my speculations

Yesterday, I wrote about the progressive agenda for local politics, and made some comments about the "living wage" campaign. Here’s what I said:

The consequences of such a policy seem to me obvious: fewer companies will bid for municipal contracts, resulting in less competition and higher overall costs, which will result in greater expenses for the municipal governments and higher taxes for city residents. Faced with higher taxes in exchange for essentially the same services, some city residents will flee to the suburbs. Those who stay will likely be those who, in effect, can’t afford to leave (because they lack transportation or live in subsidized housing) and those who are willing to pay any price, bear any burden, to live "where the action is" (affluent urban sophisticates of every sexual orientation). Because it is, in effect, hostile to the middle class, the living wage program actually contributes to the sprawl "progressives" deprecate.

Shep Barbash, who blogs at
Mistaken Optimist, challenged me in an email: "That’s quite a causal chain. Are there any empirical studies documenting
that any of these effects actually occur (fewer bids, higher costs, higher
taxes, middle-class-flight-to-suburbs, increase sprawl)?"

I wish I had a pat answer in my hip pocket, but I don’t. The best site for academic studies seems to be
this one. Here’s a study that suggests that job losses will follow from Miami’s "living wage" ordinance:

This study reaches three broad conclusions.
First, such minimum wages would result in
approximately 131,000 to 222,000 workers losing
their jobs. Second, Florida employers would
see their wage costs skyrocket in the range of
$4.9 to $8.8 billion. Third, many of the projected
wage gains would go to low-wage workers
in higher income families rather than to those
most in need.

It follows, it seems to me, that higher wage costs will mean lower profits, which will mean that fewer companies will likely bid on contracts. Less competition need not mean higher bids and higher costs, but it wouldn’t surprise me if it did. To the extent also, that the living wage requirements applied not only to contractors but to local government, the cost of government would go up regardless of whether contractors raised their prices.

Since local governments can’t run deficits, they have to get the money from somewhere (either sales taxes or property taxes). Here’s a paper that suggests that higher property tax rates generally encourage sprawl. Here’s an argument that people with the wherewithal to do so are influenced by and migrate following lower proerty tax structures.

So no one has put it all together the way I have, which gives me some cause for pause. But each step in my argument is at least plausible. And while there are ways, perhaps, of mitigating the flight occasioned by the higher levels of taxation caused by the higher costs imposed by the living wage requirement, the fact remains that any increase in labor costs (without a concomitant increase in labor productivity) has to be borne by someone, and at some point (don’t ask me what it is), companies that can’t pass those costs on to consumers (that is, taxpayers) will get out of the business. And, of course, governments that voluntarily pay a "living wage" immediately pass the cost of that wage on to taxpayers. If the result is a lower demand for government services (since folks with more income presumably have less need for public assistance), perhaps it’s a wash, with costs going up in one area and down in another. But most of the studies at which I glanced suggested that the living wage is not the most narrowly targeted means of assisting the working poor. Costs are likely to go up more than any conceivable savings will go down.

For more accessible articles on these issues, go here and here.

Discussions - 5 Comments

"The living wage is not the most narrowly targeted means of assisting the working poor."

What are the more practical alternatives for assisting the working poor, and why hasn’t the ’living wage’ crowd embraced them?

We were just discussing this in my economic geography class yesterday. A living wage law passed in Cleveland was difficult for social services organizations, who had city and county contracts to provide employment and placement services, to handle. Employers would not contract with some organizations, fearing they would have to pay this lviing wage. People complained it was just another entitlement program (just like prescription drug coverage) for the guy taking my money at the city-owned parking lot. $10.50 an hour for sitting on your backside, collecting money as a parking lot attendant??

Let’s get over it. High-wage jobs have, for all intents and purposes, fled Cleveland’s inner city. Move on, get over it and do something really good to improve Cleveland - drop the living wage and rehire all the cops and fireighters laid off!

My "living" is a million a year. Check please!

What are the more practical alternatives for assisting the working poor

I know this is blasphemy on NLT, but a plain old wealth transfer is better than a "living wage." The inefficiencies of redistribution are lower than those of price-fixing in the labor market.

and why hasn’t the ’living wage’ crowd embraced them?

Because they are hacks who need a political catch-phrase that makes them feel warm and fuzzy.

Nope, OV, the reason they use "living wage" is because "income redistribution" is a political non-starter. Another word for it is legalized theft. Most people are willing to support the government, but government acting as Robin Hood doesn’t represent the people equally. Of course, we do have a great number of income transfer programs (e.g., Social Security, Medicaid and Medicare), but these benefit such a large swath of the middle class that they are popular. Income distribution from the middle and upper-middle would sink a politician because THOSE INCOME GROUPS ARE THE ONES WHO VOTE. Really, it’s that simple.

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