Living wage: Frequently asked questions
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Living wage: Frequently asked questions

Download the entire Issue Guide in PDF format Adobe Acrobat [PDF]

Last updated November 2002

What is a living wage ordinance?
A living wage ordinance requires employers to pay wages that are above federal or state minimum wage levels. Only a specific set of workers are covered by living wage ordinances, usually workers employed by businesses that have a contract with a city or county government or those who receive economic development subsidies from the locality. The rationale behind the ordinance is that city and county governments should not contract with or subsidize employers who pay poverty-level wages.

How are living wage levels determined?
The level of the living wage is usually determined by consulting the federal poverty guidelines for a specific family size. Often, living wage levels are equal to what a full-year, full-time worker would need to earn to support a family of four at the poverty line ($17,690 a year, or $8.20 an hour, in 2000). Some living wage rates are set equal to 130% of the poverty line, which is the maximum income a family can have and still be eligible for food stamps. The rationale behind some living wage proposals is that these jobs should pay enough so that these families do not need government assistance. (The poverty guidelines are available from the U.S. Department of Health and Human Services. Note that poverty guidelines are different from the poverty thresholds; one main difference is that the poverty guidelines are more current.)

Cities and counties with a higher cost of living tend to have higher living wage levels. The wage rates specified by living wage ordinances range from a low of $6.25 in Milwaukee to a high of $10.75 in San Jose. Furthermore, some advocates have attempted to calculate a living wage based on an income that would provide for a family's basic needs (see EPI's How Much is Enough? for a discussion of "basic family budget" measures). The living wage levels based on these self-sufficiency income measures are generally much higher than the poverty guidelines.

How is the minimum wage different from a living wage?
The federal minimum wage is the minimum amount that a worker can be paid an hour (currently $5.15) and applies to almost all workers. States may also set a minimum wage that is higher than the federal minimum. Living wages commonly refer to wages set by local ordinances that cover a specific set of workers, usually government workers or workers hired by businesses that have received a government contract or subsidy. A "living wage" is a also term often used by advocates to point out that the federal minimum wage is not high enough to support a family.

What is the difference between a living wage and a "prevailing wage"?
Prevailing wage laws require firms working under a government contract to pay the "prevailing" wage for each job, that is, the wage where half of all workers in the community in the particular job earn more and half earn less. The prevailing wage is different for each occupation and each city or county.

Prevailing wage laws ensure that low-wage firms cannot unfairly underbid higher-wage firms when competing for federal or state government contracts. The prevailing wage is generally higher than the minimum wage, but can be lower than a living wage. Thus, prevailing wage laws do not prevent workers from being paid a poverty-level wage.

Why do we need living wage ordinances?
The main reason for enacting a living wage ordinance is to reverse the downward trend in wages for low-wage earners. Wages for the lowest-paid 10% of workers fell 9.3% between 1979 and 1999. The number of jobs in which wages were below what a worker would need to support a family of four above the poverty line also grew between 1979 and 1999. In 1999, 26.8% of the workforce earned poverty-level wages, an increase from 23.7% in 1979.

Living wage ordinances are necessary to prevent city and county governments from encouraging the creation of jobs that pay wages so low that workers live in poverty. Without living wage laws, governments could contribute to the creation of poverty-level jobs by hiring low-paying sub-contractors or giving businesses tax breaks or subsidies to create jobs without any guarantee that the new jobs will pay a decent wage.

Who pays the cost of the living wage increase?
The evidence from living wage evaluations indicates that the costs of living wage ordinances are primarily absorbed by businesses through reduced training and recruitment costs or reduced profits. The evaluations found no evidence of job loss, and the contract costs increased by an insignificant amount.

However, in addition to the cost of wage increases for workers, there are also administrative costs associated with living wage ordinances. One evaluation of the Baltimore living wage ordinance found that that administrative costs amounted to $0.17 per taxpayer per year.

Even if some costs from a living wage ordinance are passed on to the taxpayers, it is a value judgement on the part of the community as to whether reducing poverty through a living wage ordinance is worth the added expense. While the living wage might increase the amount of money the locality spends on contracts, local governments might also experience savings as families become less reliant on income supports and social services.

Do living wage ordinances cause job loss?
EPI's evaluation of Baltimore's living wage ordinance found no job loss as a result of the ordinance (Niedt et al. 1999). The majority of workers interviewed for the study reported no changes in the number of hours they worked after the ordinance went into effect.

Employers interviewed for another study reported that although wages increased, these costs were absorbed by improvements in efficiency; raising wages decreased employee turnover, which decreased recruitment and training costs.

The evidence from minimum wage increases also suggests that there should be little or no job loss as a result of living wage ordinances. A recent EPI study failed to find any systematic, significant job loss associated with the 1996-97 minimum wage increase (Bernstein and Schmitt 1998).

Do living wage ordinances have a negative impact on the business climate?
Some living wage detractors argue that the living wage will create a "hostile business climate." But most living wage ordinances cover too small a portion of the labor force to have such a profound effect; most living wage ordinances cover less than 1% of the local workforce. Wages are only one factor in a business' decision to move to a location, and there is no evidence that an existing living wage ordinance has discouraged firms from locating in a city.

In addition, the costs of the living wage ordinance will have a very small impact on the profits of the small number of firms affected by the law. The profit margins for firms effected by the living wage are estimated to range from 10-20% of production costs. In comparison, the wage increases from living wage ordinances are estimated to be 2% of production costs.

What effect do living wage ordinances have on the contracting process?
There is no evidence that living wage ordinances have significantly increased contracting costs for cities and counties. An EPI evaluation of a living wage ordinance in Baltimore found no significant cost increase for contracts in the city (Niedt et. al. 1999). The 1.2% cost increase for the contracts examined was less than the rate of inflation for the same period.

An evaluation of the Baltimore ordinance by the Preamble Center (Weisbrot and Sforza-Roderick 1998) also found that the ordinance did not reduce the competitiveness of the contract process. The small decrease in the number of bids per contract wasn't high enough to lower competitiveness or raise contract costs.

The evidence suggests that most firms absorb the wage increases through reduced training and recruitment costs. Even if the costs to contractors do increase, it is still profitable for these firms to do business with the city. Most firms will choose to sacrifice some of their profit margins, which are estimated to range from 10% to 20% of production, since wage increases from the ordinance only amount to an estimated 2% of production costs.

What effect do living wage ordinances have on economic development?
Living wage ordinances have the potential to counteract the destructive race to the bottom wherein cities and counties try to attract businesses by offering larger subsidies than their neighbors. The more prevalent living wage ordinances are, the less firms will be able to shop around for the cheapest locality on the basis of cutting wages.

Recent research focusing on the number and quality (in terms of wages and benefits) of jobs created by tax incentives has found that many economic development subsidies are not tied to job quality. A study of tax incentives in Minnesota by the Good Jobs First project found that 72% of subsidized jobs paid below the average for their corresponding industry. Living wage ordinances are one tool to ensure that economic development policies create good paying jobs.

Are there problems with enforcing living wage ordinances?
In many cities, the local government is slow to develop procedures for monitoring contractors' compliance with living wage ordinances. Ordinances can be enforced more effectively if there are some guidelines for enforcement written into the ordinance. Living wage ordinances are also more effectively implemented if the community groups that campaigned for the ordinance communicate with local governments about their plans for enforcement after the law is passed.

Will living wage ordinances reduce poverty?
Some critics argue that living wage ordinances will not reduce poverty because most living wage workers do not live in poor households. Evidence from EPI's evaluation of the Baltimore living wage ordinance shows that this claim is not true. Interviews with a small sample of workers covered by the living wage reveal that the average household income for covered workers was $13,632. The interviews also show how important a living wage worker's wages are to their family's well-being: an overwhelming majority of the workers interviewed were the primary wage earner in their household, bringing home an average of 68% of their family's income.

Another frequent claim is that most living wage workers are teenagers. However, studies of the minimum wage show that 70% of minimum wage workers are adults. The proportion of adults is probably higher among living wage workers, since living wage ordinances cover jobs typically held by adults, like janitors and bus aids.

Local governments often have many effective initiatives to address working poverty, while at the same time they create poverty-wage jobs through their contracting policies. Living wage ordinances are designed to make sure governments are not creating poverty through their employment practices. However, it is also important to keep in mind that while the living wage is a crucial tool in the effort to end poverty, it is only one part of a larger anti-poverty strategy.

How do living wage ordinances affect non-profits?
Some people have raised concerns that living wage ordinances will cause job loss for non-profits and therefore reduce the level of services non-profits are able to provide. The reason for this concern is that unlike private firms, non-profits are unable to absorb the cost of a living wage ordinance through a reduction in their profits. However, like private businesses, non-profits can absorb some of the costs from a living wage ordinance through a reduction in recruitment and training costs. And in many cases, non-profits can request a larger budget from the city or county in order to cover the costs associated with the wage increases.

As a result of these concerns, many living wage ordinances exempt non-profit organizations. Other ordinances include non-profits, arguing that city and county governments should increase funds to non-profits to cover the wage increases.

During living wage campaigns, non-profit managers have expressed widely differing views on the effect the living wage will have on their organizations. One study--an evaluation of the Detroit living wage ordinance--looked systematically at the effects of living wage ordinance on non-profits (Reynolds, 2000). Of the 64 non-profit organizations effected by the ordinance, there were lay-offs in one organization, where two part-time workers were laid off. Of the organizations who stated that the ordinance had a "significant" impact on their organization, nearly all would prefer to receive additional funds from the city to cover the cost of the wage increase rather than be exempt from the law.

Will employers replace less-skilled workers with higher-skilled workers if they are forced to raise wages?
Research on the minimum wage suggests that living wage ordinances will not cause job loss among less-skilled workers. A recent EPI study of the effects of the 1996-97 minimum wage increase, for example, found no evidence of job loss among teenagers and adult workers with less than a high-school education (two groups of workers that typically have lower skill levels) (Bernstein and Schmitt 1998).

In the absence of living and minimum wage laws, firms can choose either the "low road" (low pay, low training, low motivation, high turnover, and high vacancies) or the "high road" (higher pay, more training, greater motivation, lower turnover, and fewer vacancies). Almost every industry includes profitable businesses that follow both paths.

High-road employers, who would rather have a stable workforce and produce a high-quality product, have to compete for contracts with low-road employers, who provide a poorer-quality product at a lower cost. Living wage ordinances encourage businesses to take the high road, leading to higher quality services for the public and a more highly trained workforce.

Opponents of living wages have provided no evidence that the transition from low-road to high-road employment will lower employment opportunities for less-skilled workers. The evidence suggests that employers typically make the transition by retaining, training, and motivating their existing workforces.

What is the government's role in setting job quality standards?
Critics of living wage ordinances assert that the government should not intervene in the marketplace. This argument ignores the many ways in which governments intervene in the market to help businesses through subsidies, tax breaks, and other assistance. Living wage laws typically only cover businesses that receive this type of assistance or have contracts with the government.

In addition, employers indirectly benefit from government programs to help the poor. They are able to pay low wages because some government programs exist to help low-income families meet their needs. This means that the burden of providing income supports and services to low-wage workers is passed on to the public, because these programs are paid for through taxes and charitable contributions.

Many critics of the living wage argue that setting wage levels should be the responsibility of businesses alone. But in the United States, the government has long had a role in setting job quality standards that protect workers.

Beginning in the 1930s, activists struggled to get federal and state governments to establish job quality standards to prevent abuses of workers. Many of these provisions are still in effect today, including minimum wage laws, overtime requirements, and prohibitions against child labor. More recently, activists advocated for laws such as occupational safety and health standards, family and medical leave, and living wage ordinances.

Sources:
Bernstein, Jared, Chauna Brocht ,and Maggie Spade-Aguilar. 2000. How Much is Enough? Basic Family Budgets for Working Families. Washington, D.C.: Economic Policy Institute.

Bernstein, Jared, and John Schmitt. 1998. Making Work Pay: The Impact of the 1996-97 Minimum Wage Increase. Washington, D.C.: Economic Policy Institute.

Chicago Institute on Urban Poverty. 1997. Does Privatization Pay? Chicago: Chicago Institute on Urban Poverty.

Kraut, Karen, et al. 2000. Choosing the High Road: Businesses That Pay a Living Wage and Prosper. Washington, D.C.: United for a Fair Economy.

LeRoy, Greg and Tyson Slocum. 1999. Economic Development in Minnesota: High Subsidies, Low Wages, Absent Standards. Washington, DC: Good Jobs First.

Mishel, Lawrence, Jared Bernstein, and John Schmitt. 1999. The State of Working America 1998-99. Ithaca, N.Y.: Cornell University Press.

Niedt, Christopher, et al. 1999. " The Effects of the Living Wage in Baltimore." Working Paper 119. Washington, D.C.: Economic Policy Institute.

Pollin, Robert, and Stephanie Luce. 1998. The Living Wage: Building a Fair Economy. New York: The New Press.

Reynolds, David, with Jean Vortkamp. 2000. Impact of Detroit's Living Wage Law on Non-Profit Organizations. Wayne State University.

Weisbrot, Mark, and Michelle Sforza-Roderick. 1998. Baltimore's Living Wage Law. Washington, D.C.: Preamble Center.

For a closer look at the research on the living wage, see EPI's publication, " The Effects of the Living Wage in Baltimore."


Download the entire Issue Guide in PDF format Adobe Acrobat [PDF]


Living wage



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