“Living Wage” Promises Small Benefits at a High Cost

Commentary, Peter Shawn Taylor (historic), Poverty, Taxation, Uncategorized

Everyone loves to get something for nothing. That’s the reason the living wage has swept across much of the urban United States and is now official policy in Calgary, although it won’t actually be applied to any employees at present.

Living wage proponents argue it fights poverty, raises self-esteem among the working poor and makes businesses more efficient – all at an “insignificant” cost to taxpayers. But smart shoppers (and taxpayers) should be suspicious of any deal that sounds too good to be true.

Living wage policies establish a new minimum wage rate that applies to only some employees in a city. Calgary’s latest living wage proposal is due out later this week; it might apply solely to municipal employees or more broadly to employees working for businesses that contract with the city, such as cleaning staff or security.

At the proposed rate of $13.25 an hour, any worker earning less, and covered by the policy, will immediately see their incomes rise. Anti-poverty advocates see this as a direct way to help the working poor on the cheap, and without handouts.

It’s true that most US studies show the initial costs to taxpayers of a living wage to be quite modest, whether it applies to municipal workers or contractors. But if taxpayers are not paying the freight, someone else must. In Boston, 40 percent of all businesses contracting with the city earned lower profits due to the living wage. In Detroit, the extra costs to business were, on average, 2.5 percent of total contract value. These are not insignificant impacts, particularly in the midst of a recession.

Living wage advocates often claim businesses that pay living wage rates will benefit from lower absenteeism and higher productivity, compensating them for lower profits. But businesses are always free to raise their wages whenever they feel like it, regardless of city policy. The reason they haven’t is that these alleged benefits do not cover the extra costs of higher wages.

Labour economists note that creating huge disparities between living wage and non-living wage jobs of similar skill level could distort the labour market in undesirable ways: encouraging some workers to give up on their education and training, or leading to favouritism in the awarding of these lucrative but rare living wage jobs.

In the U.S.– a nation many Canadians are normally loathe to imitate on economic policy – artificially raising wages for low-skilled city jobs has caused other employees up the ladder to demand additional pay increases. This cascade effect can lead to municipal wage inflation in the long run. Also, by making private sector contractors more expensive, US economists observe that a living wage results in less contracting-out, more union control over municipal services and, again, higher taxes over time. It is not surprising that unions are big supporters of a living wage.

Even if the costs of a living wage appear quite a bit higher than first promised, the policy might still make sense if it significantly reduced poverty.

It doesn’t. U.S. experience reveals that even a broadly applied living wage reaches only one per cent of the working population. In Calgary, council decided to implement a living wage but not to apply it to casual labour so it will have no real-world effect for now on either the city’s bottom line or on wages. All service sectors contracting with the city already pay an average of more than $13.25 an hour.

It’s not even clear if the few originally intended beneficiaries of a living wage are in poverty to begin with. One US study estimated that only one-quarter of all living wage recipients lived below the poverty line. Nearly half lived in households with incomes twice the poverty line.

Among the 680 Calgary employees that would have received a big living wage raise, most were in the recreation department working as concession attendants and babysitters. They are likely to be summer students and may even be living at home in relative affluence. Raising their wages would have had no impact on poverty.

The goal of helping the working poor is an admirable one. But we already have programs to do this, such as the federal Working Income Tax Benefit or provincial welfare-to-work transition programs such as Alberta Works. These policies are proven effective and are more likely to entail broad public support than a high-cost, low benefit program such as the living wage.