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Why A Universal “Living Wage” Law Won’t Work

Why A Universal “Living Wage” Law Won’t Work. Presented By Charles M. North Department of Economics Baylor University for The Living Wage Forum November 11, 2004. “Dissenting Voice”???. Our topic:

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Why A Universal “Living Wage” Law Won’t Work

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  1. Why A Universal “Living Wage” Law Won’t Work Presented By Charles M. North Department of Economics Baylor University for The Living Wage Forum November 11, 2004

  2. “Dissenting Voice”??? • Our topic: • “Should those working full time be paid less than the amount of money needed to provide food, clothing, medical care and housing for themselves and their families?” • Waltman (2004): “living wage” is between $13.38 and $17.84 • My only point of “dissent”: • A mandatory, universal “living wage” law will not be effective in increasing overall earnings of workers or in reducing poverty! • Where I agree: • Poverty is bad, for individuals and society • It is desirable to help poor people move out of poverty • Effective government programs are desirable

  3. Minimum Wage Hikes Reduce Employment • Most studies conclude that small increases in minimum wage lead to small reductions in employment among low-skilled workersBrown (1982) • The impact is largest on the young, blacks, less educated Deere, Murphy, and Welch (1995) • Card and Krueger’s fast food study • Bad data • Refuted when studied using payroll data Neumark and Wascher (2000) • Efficiency wage arguments • depend on variation in relative wages • are possible now – employers are either stupid or the gains are already being found

  4. Why Are Pro-Living Wage Arguments Wrong? • “Living Wage” as solution to poverty assumes • Widespread large gaps between workers’ output and wages due to • Limited numbers of employers (“monopsony”) • Possible problems in information • Why not $100/hour? $200/hour? • Employers are too stupid to take advantage of efficiency gains right now • When reality bites: the sad story of ACORN. • Our reality: tripling the current minimum wage is likely to have drastically negative effects on employment

  5. Minimum Wage Hikes Don’t Reduce Poverty • Higher minimum wage leads to: • Increase in families moving from below to above poverty line • Increase in families moving from above to below poverty line • These effects basically offset each other Neumark and Wascher (2002) • Minimum wage increases have not reduced poverty rates among full-time workers Vedder and Gallaway (2002) • Narrower living wage ordinances may have small negative effects on urban poverty Neumark and Adams (2003) • Overall, increases in the minimum wage function mainly to redistribute money among the poor, not from rich to poor.

  6. Minimum Wage Hikes Reduce Schooling • Minimum wage increases induce Ehrenberg and Marcus (1982) • High income teens increase educational attainment (fewer jobs) • Low income teens reduce educational attainment (shift to full-time work or idleness) • Higher minimum wages are associated with more poor teenagers leaving school Neumark and Wascher (1995, 2003) • Employer-provided training does not increase Neumark and Wascher (2001)

  7. Where to Look for Answers? • “Living Wage” is not a magic wand • A minimum wage around $15/hour has to be distortionary • Median hourly earnings in U.S. in 2003 = $13.53 • Workers earn more by being more productive • Policies should emphasize “human capital” investment • Better and more schooling • Market-driven job training • Access to health care

  8. References • Brown, Charles, Curtis Gilroy, and Andrew Kohen. 1982. “The Effect of the Minimum Wage on Employment and Unemployment.” Journal of Economic Literature 20(2): 487-528 (June). • Deere, Donald, Kevin M. Murphy, and Finis Welch. 1995. “Employment and the 1990-91 Minimum Wage Hike.” American Economic Review (Papers and Proceedings) 85(2): 232-37 (May). • Ehrenberg, Ronald G., and Alan J. Marcus. 1982. “Minimum Wages and Teenagers’ Enrollment-Employment Outcomes: A Multinomial Logit Model.” Journal of Human Resources 17(1): 39-58 (Winter). • Kennan, John. 1995. “The Elusive Effects of Minimum Wages.” Journal of Economic Literature 33(4): 1950-1965 (December). • Neumark, David, and Scott Adams. 2003. “Do Living Wage Ordinances Reduce Urban Poverty?” Journal of Human Resources 38(3): 490-521. • Neumark, David, and William Wascher. 2003. “Minimum Wages and Skill Acquisition: Another Look at Schooling Effects.” Economics of Education Review 22: 1-10. • Neumark, David, and William Wascher. 2002. “Do Minimum Wages Fight Poverty?” Economic Inquiry 40(3): 315-333 (July). • Neumark, David, and William Wascher. 2001. “Minimum Wages and training Revisited.” Journal of Labor Economics 19(3): 563-595. • Neumark, David, and William Wascher. 2000. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment.” American Economic Review 90(5): 1362-1396 (December) • Neumark, David, and William Wascher. 1995. “Minimum-Wage Effects on School and Work Transitions of Teenagers.” American Economic Review (Papers and Proceedings) 85(2):244-249 (May). • Vedder, Richard, and Lowell Gallaway. 2002. “The Minimum Wage and Poverty among Full-Time Workers.” Journal of Labor Research 23(1): 41-49 (Winter). • Waltman, Jerold L. 2004. The Case for the Living Wage. New York: Algora Publishing.

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