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Carolina Beat

No. 636: Living-Wage Laws Hurt the Poor

Dec. 12th, 2002
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In recent years it has been fashionable for local governments to implement “living wage” laws. The laws mandate “super” minimum wages for local government employees and the employees of private contractors dealing with the government. The idea is that everyone should be paid a wage that guarantees a certain standard of living. In North Carolina both Durham and Orange County have instituted a living-wage policy.

While commonly believed that economists never agree, in a recent survey of American Economic Association labor economists, 80 percent concurred that living-wage laws punish low-skilled, poorly educated workers. These laws hurt the same individuals whom their advocates claim they are trying to help.

The employer-employee relationship is one of value for value with both parties benefiting. From an employer’s perspective, wages represent the most significant, but not the only, component of the cost of employing someone. Other components include the employer’s share of Social Security and unemployment insurance and the cost of any health and retirement benefits. An employer will hire someone only if the total cost of hiring that person is less than the value, in terms of productivity, associated with the person’s labor. It makes no sense for any employer to do otherwise. If a private-sector company consistently hired workers whose output was not as valuable as the cost of hiring them, it would suffer losses and eventually go out of business. When a public-sector employer does the same, it is failing its responsibilities to taxpayers and confusing its role as a provider of assistance to the needy with its duty to provide services to the public as efficiently as possible.

So what are the likely effects of laws that force employers to pay a living wage? First and foremost, all people whose skills are so low that the value of their productive efforts are below the mandated wage will be eliminated as potential employees. For example, assume that the political powers determine that a living wage is $9 an hour, employers have to pay anyone who is hired at least this amount (Durham’s minimum is $9.15). The full cost of hiring someone would be morethan $9, given the other compensation costs. A conservative estimate, assuming minimal benefits, would be about $11 per hour.

This law would discriminate against people whose productive output is less than $11 per hour and in favor of those whose efforts are worth more. This is why all-white labor unions in segregated South Africa favored such laws; the laws had the effect of eliminating competition from lower-skilled black laborers. Living-wage laws ensure that the least-educated and least-experienced workers in our society will receive no wage at all. Nationally, more than 30 percent of those earning under $8.15 an hour are high school dropouts. It should be clear to anyone who’s looked past a knee-jerk desire to raise people’s wages that simply mandating a higher minimum wage cannot make employees more valuable to employers.

Over the long run such laws encourage the use of labor-saving devices and reduce the demand for low-skilled labor overall. The elimination of elevator operators and gas station attendants, along with the introduction of cash-register scanning devices are examples of how markets have responded to similar laws in the past.

The important question is why are so many people in our state lacking the education and basic skills necessary to command a living wage? Unfortunately, the same people who are vocal about low wages for unskilled workers are also least likely to ask this question. That is because the answer points directly toward what is a sacred cow among most of these same advocates, namely the government-run school system. Nothing correlates more closely with higher wages than job skills and education. For the most part, government schools serve white, middle- and upper-middle-class children just fine, while failing dismally those who need it the most, poor children and minorities. This failure prevents these children from gaining the skills that would ultimately bring them a real living wage in the marketplace.

Dr. Roy Cordato is vice president for research and resident scholar at the John Locke Foundation in Raleigh.