‘Living Wage’ Laws Don’t Help Low-Income Families

Published September 1, 2005

In July, Sonoma, California passed an ordinance requiring certain employers to pay $11.70 an hour with health benefits or $13.20 without health benefits, indexed to the consumer price index.

The ordinance applies to companies with a city service contract worth at least $10,000, nonprofits with city contracts of at least $75,000, and companies that receive city loans or economic assistance worth at least $100,000.

But a new study of “living wage” laws indicates the Sonoma City Council’s decision may not help those the law is intended to benefit.

Ordinances Achieve Little

“Living wage” laws that require employers to pay more than the minimum wage do little to improve the standard of living for low-income families, according to economists Aaron Yelowitz of the University of Kentucky and Richard Toikka of the Lewin Group.

Over the past decade, more than 110 ordinances mandating “living wages” for employees in businesses contracting with a locality or receiving government financial assistance (through tax incentives or economic development grants) have been passed. The wage rates set by these ordinances often exceed the federal minimum wage of $5.15 an hour by 150 to 200 percent.

In “Effective Tax Rates and the Living Wage,” published in May by the Employment Policies Institute, Yelowitz and Toikka used government data to determine the effect of those ordinances on earnings, income, and government assistance levels.

“A reasonable reading of our results is that the living wage has a limited capability in improving the economic status of the poor,” Yelowitz said. “The limited benefit found in this report must be weighed against the decades of research clearly showing that mandated wage floors create disemployment effects–particularly for the low-skilled employees these laws are intended to help.”

Total Income Examined

Unlike many studies that focus on poverty levels, the Yelowitz and Toikka report examines total income–cash income and benefits–to determine the full effect on standard of living. Failing to account for total income leads to situations where a living wage ordinance could increase cash earnings only at the expense of other forms of income, changing the composition but not the amount of income.

For example, a family with two children can qualify for more than $4,000 in tax-free cash assistance as a result of the Earned Income Tax Credit (and earn even more in states with supplemental state-run EITC programs). A benefit of this size would clearly affect the quality of life for low-income families.

As earnings increase, recipients can see benefits from these programs decrease dramatically. The marginal tax rate in the “phase-out range” for the EITC can reach as high as 21.06 percent, and the rate for food stamps is generally 30 percent. Failing to include the loss of these benefits when evaluating the benefit of living wage ordinances can dramatically inflate the perceived effectiveness.

Specifically, the authors found enactment of a living wage ordinance decreased benefits assistance by $34 per month, while increasing earnings by $16 per month.

For every dollar in increased earnings from a living wage ordinance, then, families can expect to lose up to $2.12 in benefits assistance, greatly limiting the ability of the wage policy to help low-income families.

Idea Is Spreading

The authors’ findings are important because of a recent movement to expand traditional living wage laws. While the original ordinances were restricted to a small number of businesses, their relative popularity has led many cities to consider passing broader local minimum wages–despite evidence these laws cause unemployment among the low-skilled without substantially increasing the standard of living of potential beneficiaries.

In 2003, Santa Fe, New Mexico became the first city to pass a local living wage applying to all businesses. Initially set at $8.50 an hour, the wage floor is set to rise to $10.50 by 2008.

Later that year, voters in San Francisco passed an $8.50 minimum wage for city businesses. Madison, Wisconsin soon followed suit, as the city council passed a $7.75 minimum wage.

Craig Garthwaite ([email protected]) is director of research at the Employment Policies Institute.