Living Wages: Lessons from the United States

1. Living Wages: Lessons from the United States David Neumark Public Policy Institute of California

2. Growing spread of living wages • First living wage passed in Baltimore in 1994 • Total number now exceeds 80, mainly in cities, but also counties and even some school boards • Living wages in 9 of the 20 largest cities based on 2000 Census of Population (Los Angeles, Chicago, San Antonio, Detroit, San Jose, San Francisco, Baltimore, Milwaukee, Boston)

3. Features of living wage laws—high wage floors • Living wages are often pegged to poverty level for a family of a specified size (based on FT/FY work) • Required wage is sometimes higher if health insurance is not provided • Almost all living wages are well in excess of the federal minimum wage of $5.15 (typically by 50% or more) • Living wage exceeded the 10th centile in nearly every city, although the 10th centile wage was within one dollar of the living wage in over half of them • In some smaller CA cities, living wages range as high as $11 with health benefits, and over $12 without

4. Features of living wage laws—types of coverage • Living wage laws cover up to three types of workers • Contractors and subcontractors (most common, typically with lower bound for contract size; subset of contract businesses sometimes specified) • Business/financial assistance recipients (about ½ of laws, again typically with lower bound) • City employees (rare)

5. Features of living wage laws—estimates of affected workers • Estimates of shares of workers affected—from series of consulting/advocacy reports—are very low, typically less than 1% • Estimates based on contractor-only provisions • Business assistance coverage surely higher, but difficult to say by how much • Workers other than those directly covered may be affected (spillovers, relative demand shifts)

6. Living wage enforcement • City codes (LA, Oakland, San Jose, San Francisco) • Submission of payroll reports, contract review • Financial penalties, suspension of contracts, debarment • Allows workers to seek back pay in court • Field work (Sander and Lokey, 1998), LA • First year focused on determining coverage • Second year enforcement became more serious, with site visits, independent audits, leading to substantial compliance although weak discipline for non-compliance • Anecdotal evidence of non-implementation, non-enforcement persists

7. Predicted effects • Some employers will face higher costs for some workers • Substitution toward higher-skilled workers • Some factors moderate effects relative to, e.g., minimum wage • Inelastic demands by cities • Cost pass-throughs • Reallocation of workers • But we still expect some disemployment effects • Implications for low-wage workers: some winners, some losers • Implications for low-income families: depends on position of affected workers in family income distribution, no theoretical prediction

8. Data and “strategy” • Samples of workers and families from Current Population Survey covering most medium and large cities, covering 1996-2001 • Some passed living wage laws, some did not • Estimate effects of living wage laws by comparing changes experienced by workers and families in cities that passed living wage laws, relative to those that did not

9. Findings for wages • Wage elasticity in bottom 10th is about .04 overall (ex: 50% increase over minimum wage increases average wages of this group by about 2 percent) • But effect only appears for business assistance living wage laws • Wage effect appears too large to be plausibly attributed to direct living wage effects for workers covered by contractor-only living wage laws • Further analysis suggests that the effects on wages come from business assistance laws, which cover a larger share of workers, and are harder to “game”

10. Findings for employment • Employment elasticity for bottom 10th is about –0.1 (ex: 50% increase reduces employment rate by about 2 percentage points) • Like for wages, disemployment effects only show up for business assistance living wage laws • Some evidence of positive employment effects higher up in the wage distribution, consistent with substitution towards higher-skill workers

11. Findings for poverty • Results indicate some wage gains, but some job losses • Looking at families, we can assess effects on poverty • Evidence indicates that living wages are associated with declines in urban poverty, with elasticities on the order of –0.15 (ex: 50% increases poverty by a bit over 1 percentage point) • Contrasts with my work on minimum wages, which target very different sets of workers • Again, effects are associated with broader business assistance living wage laws

12. Wages, employment, and poverty • Given the wage increases and employment declines, results imply that living wage effects are fortuitously distributed across families so as to reduce poverty despite disemployment effects • This occurs, to some extent, because the employment losses tend to occur for the lowest-skill workers, while there are some employment gains for slightly higher-skill workers • The implication is that living wage deliver some benefits, but not necessarily to those who are the very worst off

13. Summary of evidence on effects of living wages • Positive wage effects for the least-skilled, although at the cost of some employment • Net effect is to reduce urban poverty • “Mixed bag,” as this is not achieved by helping the lowest-wage/lowest-skill individuals • Poverty results do not equal endorsement of living wages • Data more consistent with living wage achieving goal of advocates • Nothing in evidence indicates that living wages are best way to achieve goal

14. “Puzzle” regarding living wage movement • Living wage laws are pitched as anti-poverty programs • “Our limited public dollars should not be subsidizing poverty-wage work.” (ACORN)  • “[T]he living wage is a crucial tool in the effort to end poverty.” (Economic Policy Institute) • Yet rather than mandate higher wages for all workers, a curious feature of living wage laws is their frequently narrow coverage of employers that are contractors or subcontractors with the city, perhaps (not even) 1% of workforce  

15. Rent-sharing hypothesis • Living wage laws may serve other interests, offering protection of higher-paid municipal workers from low-wage workers, rather than offering protection for low-wage workers • In particular, by raising the wages that city contractors must pay, living wage laws may reduce the incentives for cities to contract out work that would otherwise be done by municipal employees • Stronger bargaining power for municipal unions • Higher wages

16. Evidence on rent-sharing hypothesis • Wages of lower-wage, unionized municipal workers increased as a result of living wages • Elasticities of average wages with respect to living wages in the .1 to .15 range • Evidence does not imply that living wages offer no assistance to low-wage workers or low-income families (restricting trade/workfare) • Although most common type of living wage law delivers gains only to unionized municipal employees

17. Overall assessment • Living wage movement has been an amazing success story in terms of securing legislation • Somewhat difficult to explain given overall predominance of conservative agenda • Economic research points to some of the expected costs of living wages, and indicates that living wages may not be the best means of helping the very lowest skill workers • But the broader living wages laws have to some extent delivered on the promise of reducing urban poverty

18. Challenges: looking ahead • Tougher budget situation at state and local level since period in which living wage movement took off • No evidence, yet, that tougher economic times will lead to retrenchment; living wages may simply become “part of the landscape” • Pres. Bush has proposed privatizing many federal government functions (contracting out), which could pose a huge temptation to the living wage movement, and likely provoke intense opposition from the federal government