A living wage is the hourly rate that an individual must earn to support their family, if they are the sole provider and are working full-time (2080 hours per year). As adopted in the US, living wages are often set so that a full-time worker with a family of four earns more than some measure of poverty (usually the official federal poverty line). According to MIT researchers, more than a third of American families are headed by individuals earning less than a living wage. Support for the principle of a living wage seems to be gathering momentum. The City of Baltimore enacted the first living wage law in the US in 1994. Currently, more than 140 American cities have living wage laws. Bernie Sanders is firmly behind a living wage for the entire country, increasing the minimum wage to $15 an hour over the next few years, as recently done by the City of Los Angeles. Robert Reich is strongly in favor of a national living wage, arguing that any wage ought to be enough to “get Americans out of poverty and off government programs” and that we the taxpayer shouldn’t be subsidizing billion dollar corporations who refuse to pay decent wages. Reich further argues that a mandated living wage will reduce employee absenteeism and turnover, as well as improve worker morale and productivity, hence neutralizing or even reducing employer costs. Increased worker productivity and spending will then lead to economic growth and expanded job creation.
Opponents of a living wage argue that although a mandated living wage sounds great in principle, it can actually harm the very workers it seeks to help. Both economic theory and evidence suggest that living wage ordinances create distortions in the labor market that have a negative impact on employment. When governments mandate a wage above the prevailing market rate, a typical result is that fewer jobs and hours become available. One of the problems is that living wage ordinances often involve a large jump in the minimum wage, which has consequences that are different than incremental minimum wage increases. Also, employers of low-wage workers tend to have low profit margins and so have to cut costs or increase prices in order to afford the higher wages. In addition, employers respond to living wage laws by hiring more qualified workers at the expense of those with fewer skills in order to offset some of the higher wage costs. Living wages therefore reduce the opportunity for less-skilled workers to participate in the labor market. This is a highly perverse outcome since less-skilled workers are presumably among the very people the policy is intended help.
So what do you think? Would a living wage law be a net good, lifting millions out of poverty? Or might it have unintended consequences, ultimately hurting more people than it helps?