Advancing a Free Society

Dead Hand of the Living Wage

Saturday, April 7, 2012

The next labor market battle in both the United States and Europe will be over the “living wage.” Long backed by both unions and progressive groups, the living wage looks like an old-fashioned minimum wage, with a critical twist. The national minimum wage, currently $7.25 an hour (up from $5.15 in 2006), applies to a wide range of workers in the public and private sector. In contrast, living-wage laws target only individuals who work in projects that get some sort of government subsidy. As the New York Times put it in an impassioned editorial about the proposed Fair Wages for New Yorkers Act, a city that doles out “hundreds of millions of dollars a year to private developers” should be in a position to ask them to pay decent wages to the workers whose jobs these subsidies created.

The New York proposal was drafted to do just that. It called for imposing one of two living-wage requirements on employers who receive $1 million or more in discretionary financial assistance from New York City: either pay workers $10 per hour in wages plus benefits, or pay them $11.50 per hour without benefits. That works out to a wage boost of 58 percent for workers in that category. Needless to say, that basic requirement was riddled with exceptions for various small businesses and the like, all of which would raise compliance issues. Supporters of new social legislation always underestimate that problem.

Backers defended the proposal by arguing that those who receive government subsidies ought to share them with the workers they hire. They also noted that at least one econometric study by the Center for American Progress concluded that cities that had adopted these proposals had the same level of employment growth as cities without living-wage requirements. The most charitable reading of this finding is that these subsidy programs fail to improve matters, owing to the many unanticipated consequences they introduce into both public finance and the labor market. The reality will prove far worse.

Continue reading Richard Epstein…