Why a Living Wage Doesn’t Kill Poverty

Publication, Municipal Government, Peter Shawn Taylor

Executive Summary

• A living wage involves a municipally-set minimum wage rate that applies to all city employees and, in many cases, to employees of businesses that contract with the city. This wage rate is set by a variety of arbitrary methods.

• While largely unknown in Canada, the living wage has become a popular social policy tool across much of the United States. It is currently being proposed in Calgary and in the Regional Municipality of Waterloo in Ontario.

• Despite its popularity with social policy groups and unions, the effectiveness of a living wage is in considerable doubt. While those directly receiving a living wage see their incomes rise, this group typically represents a very small proportion of the total labour force. A living wage does not have any direct effect on the broader working poor population.

• The living wage raises issues of appropriate targeting. There is no guarantee that the recipients of a living wage are in poverty to begin with. In the US it has been estimated that only one-quarter of living wage earners were living in households below the poverty line. In Calgary, it appears many of the proposed recipients are summer students and casual workers.

• While the benefits appear small and poorly targeted, living wages may entail considerable hidden costs and unintended consequences. Most direct expenses appear to be borne by the private sector. This raises questions of fairness. Living wages may also lead to job losses among low-skilled workers. And it could encourage workers to stay in low-skilled jobs rather than upgrade their skills or education.

• While the direct costs to municipal taxpayers appear modest, there is evidence of substantial indirect costs. Paying low skilled municipal workers higher wages can lead to an inflationary cascade effect as higher skilled workers demand compensatory raises. It has also been proposed that living wage policies will lead to greater union control of municipal services, causing less contracting-out and higher municipal payroll costs over time.

• A living wage fails all the standard criteria for evaluating new social policies: it provides a low social return, it is inefficient, unfair and creates many negative incentive effects. Providing small benefits to a limited group of individuals who may or may not be in poverty is unlikely to solve the problems facing the working poor.

• If the policy objective is to help the working poor, federal or provincial welfare-to-work transition programs are much better targeted and more effective. These programs are also more likely to enjoy broad public support.

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