Frequently Asked Questions
about the Living Wage

Q. What does "living wage" really mean?

At an absolute minimum, a living wage is the amount a person would need to earn to stay above the federal poverty level. In 2000, this amounted to $17,050 a year for a family of four, or $8.20 per hour for a full-time, year round worker. A true living wage varies city by city because it takes into consideration the cost of living (housing, food, child care, health care, transportation, etc.) in each location.

Q. Won't forcing businesses to pay a living wage cause inflation and inhibit economic growth?

Three studies on existing living wage ordinances found early evidence that relatively little of the extra cost in labor has been passed on to consumers or the cities with whom they contract. The studies suggest that companies are absorbing the higher wages or finding ways to offset them (Uchitelle, 1999).

Higher wages may actually help firms reduce turnover and fill vacancies, according to some economists, and can also lead to greater worker productivity by improving morale and overall job satisfaction. These benefits generate efficiency gains that could allow firms to absorb the increase in labor costs (Card and Krueger, 1999).

Some studies have examined the potential inflationary aspects of minimum wage increases. An Oregon Center for Public Policy study of the impact of the 1997 and 1998 minimum wage increases on the Oregon restaurant industry found that inflation of restaurant meal prices matched general price increases in the rest of the economy and was less than general food and beverage price inflation. In another study, economists found that New Jersey’s 1992 minimum wage increase led to modestly increased prices of restaurant meals, but there was no evidence that prices rose faster among retail stores that had the greatest proportion of minimum wage workers (Card and Krueger, 1999).

The Baltimore living wage law increased the aggregate cost to the city by 1.2%, less than the cost of inflation. The inflation-adjusted cost to Baltimore of the 26 living wage contracts studied actually declined slightly despite the wage hikes, according to a 1999 study by the Economic Policy Institute. These findings are consistent with those of the Preamble Center study, which found a decline of 2.4% in inflation-adjusted contract prices after the first year of the Baltimore living wage ordinance. The Preamble Center study suggested that the decline in overall costs might be attributed to efficiency gains at higher wages, and to the competitive pressures of the bidding market, which discouraged contractors from inflating their prices.

Q. Won't raising wages result in job loss for the very workers you are trying to help?

When the federal minimum wage was first adopted in 1938 as a part of the Fair Labor Standards Act, its two primary purposes were to create jobs and increase consumer purchasing power in the wake of the Great Depression. Legislators reasoned that good-paying jobs would increase consumer purchasing power, which in turn would stimulate the creation of still more jobs. The legislation played a vital role in getting businesses and the economy back on track.

Only a few studies to date have examined the unemployment effect of living wage laws. The Economic Policy Institute concluded in 1998 that after four years in force, the Baltimore living wage increase did not result in any discernible job loss. A study of the Los Angeles living wage law, the nation’s most far-reaching living wage law, found that total employment on City service contracts declined by about 3% over the first eighteen months of implementation (Sander and Lokey). The authors of this study note that in Los Angeles, unlike Baltimore, the city did not put contracts up for competitive bids, choosing instead to re-negotiate contracts with existing vendors. The study concluded that implementing a competitive bidding process would help "hold down both costs to the city and the loss of worker jobs."

There is a much broader body of evidence examining the relationship between increases to the minimum wage and unemployment. The vast majority of economic research concludes that there is little or no loss of jobs associated with small wage increases, where small is defined as increases that adjust the minimum wage for the effects of inflation.
The clearest evidence for evaluating the unemployment impact of increases in the wage floor comes from the increases to the federal minimum wage in 1996 and 1997. Following these increases, the economy has continued to produce jobs at near-record rates. In February 2000 only 7.2% of the working age population was not in the workforce, compared to 11% in 1994. Most remarkable are the gains in employment made by historically disadvantaged groups. Since 1998, millions of former welfare recipients have found work, though most at or near minimum wage. Overall teenage unemployment is at a 30-year low, while unemployment among African-American teens has fallen to 27.6%, its lowest level since this data was first gathered in 1972 (Bernstein, 1999).

Q. Won't a living wage policy chase away existing businesses and deter new investment?

For many businesses, their assets have value in a particular location and not outside of it. For example, restaurants, hotels, utilities, construction, universities, and many professional and personal services are very strongly place-bound (Schoenberger). If faced with a requirement to increase wages, it is likely that moving out of the city would be a last resort for such location-specific businesses. A further disincentive to moving to a new location are the numerous costs associated with relocation.

Some communities are concerned that higher wages may discourage new businesses from opening or expanding. It is true that wage levels are one factor in a business’s decision as to where to locate. And if all else were equal, the wage level might very well be the determining factor. However, all else is never equal (Schoenberger). Access to markets and transportation systems, infrastructure, the education and skill level of the available workforce, and overall quality of life all vary city to city and exert influence over location decisions.

Early fears that a living wage law would drive investment from a city have not materialized in Baltimore, the first city to adopt a living wage ordinance, back in 1994. An analysis of the fiscal and economic costs of Baltimore’s living wage ordinance by the Preamble Center in 1996 found no evidence that local businesses or potential investors have responded negatively to the ordinance. The study found that the value of business property, which had been declining in real terms in the four years preceding the passage of the ordinance, increased sharply after the ordinance passed. While the authors are not suggesting a direct correlation between raising wages and increased business property values, neither did the living wage ordinance drive down business property values.

Economist Erica Schoenberger suggests that the real deterrent to urban investment is not high costs, but high levels of poverty:

"Poverty, quite plainly, generates insecurity and difficulty for the rich and the poor alike. It severely limits the local market, which makes a city uninteresting to many kinds of business. It produces ill-prepared workers whose lives are easily disrupted by small catastrophes. If the car breaks down, if the kid gets sick, it suddenly becomes impossible to be a reliable worker. Poverty also generates poor health among workers, making them less reliable still and raising the cost of employing them. It creates a lack of physical security for workers, employers, and property. It produces also a meager tax base and poor physical infrastructure and public services. The costs of doing business could be subsidized to near zero in such a place and investment might still not be forthcoming."

So, rather than threatening the city’s economic prospects, a living wage policy, by helping to raise workers out of poverty, becomes a central tool for economic development and a positive contributor to a city’s investment climate (Schoenberger).

Q. The type of work done by low-wage workers isn't worth higher pay, right?

Throughout the first seventy years of the 20th century, improvements in worker efficiency, measured as productivity, have provided the basis for steady wage increases for workers. This relationship has changed dramatically over the last 30 years. Between 1973 and 1998, worker productivity increased by 46.5%. Over the same period, hourly wages for average workers in 1998 were still 6.2% below 1973 (adjusting for inflation), and weekly wages were 12% lower. The benefits of productivity improvements, once shared with workers, are now being disproportionately distributed elsewhere: to shareholders and corporate executives, and to consumers in the form of lower prices.

No matter the job performed, whether preparing hamburgers or nursing sick patients, workers must earn enough money to pay the rent and buy food and other basic necessities. Living wage proponents argue that employers who pay poverty wages are effectively being subsidized by taxpayers through government assistance programs (e.g., food stamps, Earned Income Tax Credit) which help many low-wage employees survive.

Q. Shouldn't we let the free market, not the government, determine wage levels?

What is often referred to as the "free" market often isn’t free at all. Government plays a rule-setting role, seeking to promote market efficiency, while also containing the social costs stemming from a completely unfettered market. For example, the Federal Reserve Board tries to manage economic growth and control inflation by manipulating interest rates. Businesses are often beneficiaries of government intervention. Federal, state, and local governments consistently provide billions of dollars in subsidies, tax breaks, and other forms of corporate welfare to businesses in the name of economic growth.

Given the degree to which many businesses already benefit from market interventions, it is inconsistent and even spurious for businesses to selectively argue that the market should be left to its own devices in the case of determining wage levels.

Additionally, businesses that pay poverty wages indirectly rely on government assistance programs to make up the difference between these wages and what it costs their employees to live. Without the intervention of government and private charities, paying poverty wages wouldn’t be a sustainable business practice.

Q. Aren't most low-wage workers teenagers?

Extensive analysis of past and proposed minimum wage policies has determined that the primary beneficiaries are low-wage workers who are disproportionately adult, female, and people of color. Most of the workers who benefit are members of low-income families.

The Economic Policy Institute (EPI) analyzed the current proposed legislation to increase the minimum wage from its present level of $5.15 to $6.15 per hour. EPI found that about 11.8 million workers (10.1% of the workforce) would receive an increase in their hourly wage rate if the minimum wage were raised to $6.15 per hour. Seventy-two percent of these workers are adults (age 20 and older) and 59.2% are female. Because the minimum wage workforce is disproportionately minority, 15.1% of those affected by the increase are African-American and 17.4% of those affected are Hispanics (compared to 11.6% and 10.6% respectively of these groups’ total workforce representation).

Close to half of the would-be beneficiaries of the minimum wage increase worked full-time (48.2%) and another third (32.9%) worked between 20 and 34 hours per week. Data from the last minimum wage increase reveal that 58% of the benefits went to low-income working families in the bottom 40% of income distribution.

Works cited:

Bernstein, Jared. "Minimum Wages and Poverty," Testimony originally presented to the U.S. House Education and Workforce Committee, April 27, 1999. Bernstein is an economist at the Economic Policy Institute in Washington, DC.

Card, David and Chad Krueger, 1999. Myth and Management: The New Economics of the Minimum Wage, (Princeton University Press). Also see Card and Kreueger, 1998, "A Reanalysis of the Effect of the New Jersey Minimum Wage Increase on the Fast-Food Industry with Representative Payroll Data" (National Bureau of Economic Research).

Sander, Richard and Sean Lokey, 1998. "The Los Angeles Living Wage: The First Eighteen Months" (UCLA and the Fair Housing Institute).

Schoenberger, Erica, 1999. "The Living Wage in Baltimore: Impacts and Reflections," unpublished paper (Dept. of Geography and Environmental Engineering, The Johns Hopkins University).

Uchitelle, Louis. "Minimum Wages, City by City; As Local Laws Pass, More Businesses Complain," New York Times, November 11, 1999, p. C1.

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