Big Idea: Living Wage Junkonomics

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Last fall, the city of Santa Monica, California, passed a living wage ordinance, one of at least 70 now law across the nation. The proposal, predictably, was fought bitterly by local business, especially the hotel and restaurant owners who were its particular targets; and supported, not quite as predictably, by a coalition that included the major local unions as well as the more usual progressive and community organizations. In its expansive scope—-and in the fierceness of the debate over its economic effects—-Santa Monica’s ordinance is one of the closest precedents for the living wage bill now being considered by the New York City Council.

If passed, the New York law would require most city contractors and businesses that get municipal subsidies, including tenants of subsidized buildings and the quasi-public Business Improvement Districts, to pay their employees a living wage of $8.10 an hour. The bill is sponsored by Council Speaker Gifford Miller, and cosponsored by a majority of the City Council. But given the impressive intellectual firepower being deployed on both sides of the debate, that hardly assures its passage.

In New York, the battle lines have already begun to be drawn. “We’re talking about a so-called living wage of $8.10 an hour,” says Bob Masters of the Communications Workers union, which is supporting the bill. “It would be outrageous for business to come out against this—-it’s hard for me to believe that their opposition wouldn’t be embarrassing to them.”

Not so. Before the bill was even introduced, the New York City Partnership and Chamber of Commerce started circulating a memo to rally opposition to the law, claiming it would hurt businesses—-especially small and minority–owned businesses. (The Partnership declined to comment for this article.)

Though each city’s law is different, the debate tends to follow a predictable pattern: Business opposes them, on economic grounds; labor and community activists support them. But while the proponents of living wage bills have stuck with a pretty consistent argument—-that raising wages helps lift low-wage workers out of poverty—-the opposition’s arguments have followed a fascinating evolution.

At first critical of such bills on principle, opponents from the business camp soon ran up against a political wall: The idea of raising living standards for low-wage city workers has a powerful populist appeal. So in recent years, business groups have changed course, taking the savvy and original tack that living wage laws actually hurt the poor.

“They worsen the plight of the lowest-skilled people, those trying to get into the workforce,” says Employment Policies Institute staff economist Richard Toikka. “Our position is that these laws are generally a bad idea.”

E.J. MacMahon of the Manhattan Institute goes even further. “Even if it raised the incomes of low-wage workers, it would be bad policy,” he says, asserting that a mandated $8.10 wage poses a threat to the economic recovery of the city and, especially, lower Manhattan.

“Labor economists have long studied how living wage laws hurt the people they are intended to help,” warned the lead editorial in Crain’s New York Business the week the bill was proposed, predicting that affected businesses “would take the only step available to them. They would reduce their staffs and cut back on the services they provide. Higher wages for some; no jobs for others.”


As proof of this dire prediction, the Crain’s editorial cited a study done by Toikka’s Employment Policies Institute. The most prominent institutional critic of the living wage movement, the institute sponsors and disseminates studies claiming massive job losses from any form of minimum-wage increase.

It also devotes considerable resources to questioning the motives of living-wage advocates. The institute’s basic handbook has a special section on Robert Pollin, a University of Massachusetts economist who has worked on a number of living wage studies and authored, with Stephanie Luce, the book The Living Wage. “Who is Robert Pollin?” the guide asks, suggesting that his affiliation with the now-defunct New Party and, worse, with the Union of Radical Political Economists, demonstrates that his views on living wage laws cannot be trusted. The Employment Policies Institute has even bought placement on major Internet search engines like Google, so that their site comes up when Pollin’s name is typed in.

More generally, the institute paints living wage laws as an expression of “union self-interest,” pushed by labor bosses and their fellow travelers—-such as the “labor-funded” Economic Policy Institute, whose name it has co-opted, even reserving domain name While about one-quarter of the Economic Policy Institute’s budget does come from unions, all of its living wage research is foundation-funded.

But the Employment Policies Institute is more coy about its own connections: It was founded by the restaurant lobby. Executive Director Richard Berman, once an executive for restaurant chains including Bennigan’s and Burger King, is also a registered lobbyist for the food and beverage industry. He was also a close political ally of former House Speaker Newt Gingrich. After meeting with Berman, a Gingrich staffer wrote a memo saying, “I think there is a very real possibility here of $20,000-$25,000” if Gingrich could “incorporate some of the ideas” Berman advocated—-chief among them that low-wage food-service jobs were not necessarily a dead end—-in his televised college course.

Gingrich denied that the money influenced his lectures. But after EPI donated $25,000, the Speaker described fast-food work as “the entrepreneur’s great learning opportunity” and praised several fast-food chains by name. “When you hear someone say, ‘Well, that’s a hamburger-flipping job,’” Gingrich told his students, “you know that’s somebody that doesn’t understand America.”


The argument against living wage laws—-which the Employment Policies Institute calls “a kind of super-minimum wage”—-is simple: Workers earn low wages because that is all they are worth in the marketplace. If their wages are raised by fiat, employers will no longer find it worthwhile to hire them and will cut jobs instead. Thus the poorest workers are hurt, not helped, by such bills.

“They worsen the plight of the lowest-skilled people, those trying to get into the workforce,” says Toikka. “Compared to, say, job training, the living wage seems to say, ‘Raise the wages, and skill development will take care of itself.’ But wages,” he says—-and this is the crux of the anti-living wage argument—-“are ultimately a matter of skills; you can’t mandate a higher market wage. If wages are raised to a high enough level, employers will reduce jobs—-although I’m not sure if $8.10 is that level.”

Even 10 years ago, few in the economics profession would have disagreed. Recent research, however, has painted a very different picture of minimum wages. Since the mid-1990s, economists have studied the effects of minimum wage laws (including living wages) on incomes, employment and poverty, and with few exceptions this work has shown the fears of the living wage pessimists to be exaggerated, if not baseless.

The decisive event in contemporary research on minimum wages was the 1992 publication in the American Economic Review, the premier journal of the economics profession, of an article by David Card and Alan Krueger on the effects of an increase in the New Jersey state minimum wage on fast-food employment.

Fast food was chosen as a competitive industry with a very large proportion of workers earning the minimum wage. To the surprise of economists, there appeared to be no additional unemployment as a result of a substantial state-mandated increase in wages; if anything, employment in New Jersey fast-food restaurants appeared to go up as a result of the law.

Card and Krueger’s work spawned dozens of critiques, replications, and extensions, but when the dust had settled, the consensus was clear. In the words of Richard Freeman of Harvard, perhaps the country’s foremost labor economist, “the entire literature on the minimum wage [now agrees] that employment losses are modest.”

(Not surprisingly, one of those unconvinced by Card and Krueger’s work was EPI’s Berman, who attempted his own study of the effects of the New Jersey law. To put it gently, he was a little out of his league: While Card and Krueger used a range of government data to conduct a comprehensive survey of fast food restaurants in New Jersey and 14 counties of eastern Pennsylvania, Berman relied on “informal contacts in the restaurant industry” to assemble his sample; his Pennsylvania control group consisted of a single 23-restaurant Burger King franchise.)

Such clear empirical evidence seemed to call for adjustments of theory. The more sophisticated living wage opponents have shifted their focus to an argument we’ll call “labor substitution”: unskilled workers will lose out not because their jobs will disappear, but because higher-skilled workers will replace them. This argument hangs on the doctrine of “marginal productivity”—-that workers’ wages depends on the amount of human capital, or skill, they bring to the table.

This argument is harder to refute on an empirical level—-not so much because the evidence supports it but rather because human capital is notoriously difficult to measure. A recent survey in The Journal of Economic Perspectives found that, almost without exception, efforts to connect earnings to conventional measures of human capital—years of schooling, work experience, scores on standardized tests—-nearly always leave the vast majority of earnings differentials unaccounted for.

All this points to what perhaps should be obvious: Employers set wages with a number of goals in mind. They want to create internal hierarchies, elicit greater effort, discourage turnover, perhaps even conform to prevailing notions of equity, all connected to their goal of making money. But the central premise of most objections to living wage laws-—that market wages are simply reflections of a worker’s skill—-is incorrect.

Santa Monica, desperate to sort through all this, turned to Pollin to analyze the specifics of its living wage proposal. With his team at the Political Economy Research Institute (of which this writer was a junior member) he turned out a detailed series of examinations of the economic effects of the proposal.

Then, in a rare example of urban-policy peer review, the report and proposal were submitted to two of the country’s most prominent labor economists, Richard Freeman of Harvard and David Neumark of the University of Michigan, with approval conditioned on their favorable assessment.

Throughout the 1990s, Neumark was one of the most implacable academic opponents of living wage laws. He produced a number of studies arguing that the unemployment resulting from living wage and minimum wage laws was substantial. Because Neumark was both a living wage skeptic and a respected labor economist, he was frequently asked to produce reports on the impact of proposed living wage laws.

Freeman agreed with Pollin’s conclusion that the only loss would be to hotel owners’ excess profits, while the low-wage workers would clearly benefit. Neumark was skeptical of Pollin’s claims about the effect on businesses, and agnostic about the benefits to workers. Santa Monica went ahead and adopted the proposal.

But now, Neumark has done his own study. In 2001, the Public Policy Institute of California invited Neumark to conduct the most comprehensive study to date on the impact of living wage laws, examining changes in wages, employment and poverty in the wake of every existing living wage law.

Given Neumark’s history, the results came as something of a shock. According to his study, while there had been some job loss as a result of living wage laws, it was minimal; living wage laws, he found, have “sizable positive effects” on low-wage workers and “moderately reduce urban poverty.” In conclusion, Neumark wrote that a cautious reading of the evidence should “dispel fears that living wage laws have the unintended effect of increasing urban poverty.”

EPI is right about one thing, though. In lectures and op-eds and on their web site, they warn that living wage campaigns have their own momentum, and that, in the long run, the result may be “nothing less than a national minimum wage.” On that one point, few proponents would disagree.

J.W. Mason studies economics at the University of Massachusetts-Amherst.