Businessweek Archives

What's So Bad About A Living Wage?


Social Issues: Economics

What's So Bad about a Living Wage?

Paying above the minimum seems to do more good than harm

Juana Zatarin lives in a one-bedroom apartment that rumbles whenever a jumbo jet lands at Los Angeles International Airport. But life is looking up for the 44-year-old mother of three, who works as a baggage screener at the airport. Thanks to Los Angeles' so-called living-wage law, which requires city contractors to pay employees a minimum of $8.97 an hour, Zatarin's salary has jumped nearly 50% in the past year. She will earn some $18,000 this year, putting her above the $17,028-a-year federal poverty line for a family of four for the first time in years. This summer, Zatarin took her family on vacation for the first time since 1994. "I'm more relaxed now that I can make our payments," she says.

While most mainstream economists would laud Zatarin's good fortune, they typically disapprove of laws that require firms with municipal contracts to pay their workers enough to stay out of poverty. Ever since Baltimore passed the first such ordinance in 1994, economists have derided them as little better than the federal minimum-wage law, which many believe forces employers to ax jobs.

Now that view is changing. A small but growing body of academic research suggests that living-wage laws do more good than harm. So far, they have imposed little, if any, cost to the 50 cities that have passed them, the studies find. And they have led to few job losses and have lifted many families out of poverty. "I'm no longer ready to dismiss these policies out of hand," says David Neumark, a Michigan State University economics professor--and prominent minimum-wage opponent--who recently published empirical research showing a positive overall impact of living-wage laws.

The fresh thinking is giving new ammunition to the living-wage movement, which has steadily gained momentum since its initial Baltimore success (table). Advocates, mostly grassroots religious and labor groups, are pushing for new laws in more than 70 cities and a dozen states. The success of living-wage ordinances also may spur efforts to lift the federal minimum wage, since the laws show little adverse job impact even from pay levels of up to $10.75 an hour in San Jose, vs. the federal minimum of $5.15.NO LOSS. The new research shows that living-wage laws don't cause many job losses because employers learn to live with them by trimming profit margins and finding efficiency gains from improved morale and lower turnover. Unlike the federal minimum, which covers most workers, living-wage ordinances apply only to employees of companies with city contracts. Studies of Baltimore, Los Angeles, and Detroit found no evidence of job losses.

Neumark's research, which compares 12 cities with living-wage laws to a control group of cities without them, finds minimal job losses, which are more than compensated for by significant income gains among the lowest-paid workers. Even higher taxes aren't a necessary outcome. In Baltimore, city contracts have risen less than inflation, at 1% to 2% a year--mostly because contractor profit margins declined, according to a study by the Economic Policy Institute, a Washington think tank.

The findings are analogous to a new perspective on minimum wages that emerged in the mid-1990s. Back then, several economists challenged conventional thinking with studies that found little or no job loss from higher minimum-wage levels, at least in a growing economy like the U.S. is enjoying today. However, since 1997, continued opposition from small business and congressional Republicans has blocked increases in the federal minimum, which is now 40% below the federal poverty line.

Although the economic debates about living and minimum wages aren't exactly the same, the success of the former may boost efforts to lift the federal minimum. Already, Representative Luis V. Gutierrez (D-Ill.) has introduced a living-wage bill for federal service contracts. "During a period of prosperity, when people are sleeping in cars after working a full day, paying a living wage is a basic matter of fairness," asserts Jen Kern, a director at the Association of Community Organizations for Reform Now (ACORN), a Washington advocacy group.

Opponents disagree. Business groups argue that a living wage would be more expensive in a down economy and more disruptive if applied nationally, or even to workers not employed by city contractors. For example, the Santa Monica Chamber of Commerce argues that a proposed $10.69-an-hour living wage, which would apply to all companies in the city's coastal tourist zone, would force local businesses to close. Still, those arguments may carry less clout now that so many other cities have passed living-wage laws--and escaped the dire consequences.By Steven V. Brull in Los AngelesReturn to top


American Apparel's Future
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus