Economic Analysis of a Living Wage Ordinance

Content

“If you get all the facts, your judgement can be right; if you don’t get all the facts, it can’t be right.”
— Bernard Baruch

Decisions made without proper information risk serious consequences. Nowhere is this more true than in public policy. Nonetheless, city councils across the country are now making decisions on one of the hottest public policy concepts in memory — the “living wage” — without access to the facts that would form the basis of sound public policy.

The “living wage” movement is active in more than 70 cities and at least 39 states. Typically, living wage advocates push for a super-high minimum wage — between 50% and 150% higher than the federal minimum wage — for city contractors or employers who receive special treatment from a city/county. More than 30 major cities have already implemented a living wage requirement, with passage expected soon in many other jurisdictions.

To date, few economists have had the opportunity to study the living wage. The authors of this report, Dr. George Tolley, Peter Bernstein and Michael Lesage, have blazed a trail that other researchers can now follow. The methodology employed by the authors provides information essential to any informed decision on the living wage.

Findings
This study was originally presented to the Chicago City Council in July 1996. At the time, the Council was considering a “living wage” ordinance calling for a 79% minimum wage hike for employees of city contractors and firms that received municipal tax breaks. The results of this study were alarming:

The ordinance would cost the city nearly $20 million per year. The city would spend more than 20% of this amount ($4.2 million) on the administrative costs of certification, monitoring, and enforcement of the ordinance. This $20 million cost would require a permanent tax increase on citizens of Chicago.
Labor costs among affected firms would rise by $37.5 million. This amount does not include additional administrative costs employers would incur in submitting payroll data and other paperwork to the city, or in determining which workers (if any) would be covered by the ordinance. Even firms that already paid more than the wage called for in the ordinance would bear the ongoing costs of proving their compliance.
The city could expect at least 1,300 lost jobs as a result of the ordinance.
On a per-employee basis, the costs of the proposal could total more than $7,000. However, an affected full-time worker supporting a family would see his or her disposable income rise by less than $1,900 under the ordinance. Meanwhile, the federal government would “gain” more than $4,400 (much of it from increased payroll and income taxes), and the state government would “gain” more than $900.
The living wage ordinance would result in pay increases for about 8,470 workers. However, the authors point out that many of these workers were not in poverty to begin with. Nationwide, more than 70% of workers with wages below $7.50 live in households with incomes well above the poverty line for a family of four. Thus, while more than 8,400 workers in Chicago would get a raise, the number actually pulled out of poverty would be much smaller — despite tens of millions of dollars in new costs to the city. Moreover, the authors note that many of the 1,300 people who would lose their jobs could fall into poverty.

When presented with these facts, the Chicago City Council shelved the living wage proposal. Advocates of the policy later convinced the City Council to accept a less extensive version of the living wage proposal. City officials estimated this second proposal would cost the city as much as $4 million.

Current Perspective
This is perhaps the most comprehensive study of the living wage yet produced. It provides a clear outline of concerns that officials in other municipalities should consider. Among these concerns:

Overall cost: this study suggests that even a modest proposal easily stretches the cost into the millions of dollars.
Efficiency of the policy: this study suggests the living wage is a grossly inefficient use of city resources if the goal is to help family heads increase their income. Analyzing the true impact on family income means incorporating federal and state income taxes, FICA taxes, reductions in the Earned Income Credit, and reduced food stamp and Medicaid benefits.
Job loss: employment reductions among the least skilled can be estimated and should be considered prior to passage of a living wage ordinance.

While the magnitude of these results will vary by locality, there are two reasons why one could reasonably suggest that the numbers in this study underestimate the potential impact in many cities. First, depending on how it is enforced, the ordinance could cover many employers who were not covered by this study. The study does not include subcontractors of firms that benefit directly from city assistance. For instance, the study covers building developers who receive city assistance, but not the building management company or janitorial service hired by the developer to maintain the building. Moreover, the study does not include small businesses located in buildings sold by the city at a discounted price — arguably a form of city assistance. The study does not include manufacturing firms which sell equipment to the city, though the entire assembly lines of such firms could be covered under the 1996 ordinance proposed in Chicago. And the study does not include future reductions in job creation as employers decide whether to expand their operations in, or business with, the city of Chicago. Adding these elements to the analysis would clearly produce substantial increases in the total cost estimates.

Second, the authors studied a proposed 79% increase in the minimum wage for certain employers in Chicago. Some current living wage initiatives call for wage increases that are larger. In California, the city of San Jose recently passed a living wage ordinance that carries a wage rate 87% higher than the state’s current minimum wage and 109% above the federal minimum wage rate. In San Francisco, living wage proponents originally sought a wage rate that was 152% higher than the applicable minimum wage. Almost all of the 70+ living wage ordinances proposed so far call for wage rates that are at least 41% above the current federal minimum wage.

While living wage proposals vary on specific points, the structure of the Chicago proposal studied here is not uncommon. Similar initiatives are being considered in or have passed in areas as diverse as Los Angeles, CA; Montgomery County, MD; Madison, WI; Detroit, MI; Hartford, CT; and Oakland, CA.

Conclusion
The authors provide a comprehensive model for other cities to utilize in determining the potential local impact of a living wage in their respective cities. City officials currently considering a living wage ordinance should employ a credible method to weigh these potential costs against the arguments of living wage advocates before making their decisions. The Employment Policies Institute has worked with George Tolley, Peter Bernstein and Michael Lesage to publish this report so that policy makers across the nation will have access to at least one proven model for studying this issue and developing critical information that will support sound public policy.