Living Wages:
Lessons from the United States
David Neumark
Public Policy Institute of California
Growing spread of living wages
• First living wage passed in Baltimore in 1994
• Total number now exceeds 80, mainly in cities,
but also counties and even some school boards
• Living wages in 9 of the 20 largest cities based on
2000 Census of Population (Los Angeles,
Chicago, San Antonio, Detroit, San Jose, San
Francisco, Baltimore, Milwaukee, Boston)
Features of living wage laws—high
wage floors
• Living wages are often pegged to poverty level for a
family of a specified size (based on FT/FY work)
• Required wage is sometimes higher if health insurance is
not provided
• Almost all living wages are well in excess of the federal
minimum wage of $5.15 (typically by 50% or more)
• Living wage exceeded the 10th centile in nearly every city,
although the 10th centile wage was within one dollar of the
living wage in over half of them
• In some smaller CA cities, living wages range as high as
$11 with health benefits, and over $12 without
Features of living wage laws—types of
coverage
• Living wage laws cover up to three types of
workers
– Contractors and subcontractors (most common,
typically with lower bound for contract size;
subset of contract businesses sometimes
specified)
– Business/financial assistance recipients (about
½ of laws, again typically with lower bound)
– City employees (rare)
Features of living wage laws—estimates
of affected workers
• Estimates of shares of workers affected—from
series of consulting/advocacy reports—are very
low, typically less than 1%
• Estimates based on contractor-only provisions
– Business assistance coverage surely higher, but
difficult to say by how much
– Workers other than those directly covered may
be affected (spillovers, relative demand shifts)
Living wage enforcement
• City codes (LA, Oakland, San Jose, San Francisco)
– Submission of payroll reports, contract review
– Financial penalties, suspension of contracts, debarment
– Allows workers to seek back pay in court
• Field work (Sander and Lokey, 1998), LA
– First year focused on determining coverage
– Second year enforcement became more serious, with
site visits, independent audits, leading to substantial
compliance although weak discipline for noncompliance
• Anecdotal evidence of non-implementation, nonenforcement persists
Predicted effects
• Some employers will face higher costs for some workers
• Substitution toward higher-skilled workers
• Some factors moderate effects relative to, e.g., minimum wage
– Inelastic demands by cities
– Cost pass-throughs
– Reallocation of workers
• But we still expect some disemployment effects
• Implications for low-wage workers: some winners, some losers
• Implications for low-income families: depends on position of
affected workers in family income distribution, no theoretical
prediction
Data and “strategy”
• Samples of workers and families from Current
Population Survey covering most medium and
large cities, covering 1996-2001
• Some passed living wage laws, some did not
• Estimate effects of living wage laws by comparing
changes experienced by workers and families in
cities that passed living wage laws, relative to
those that did not
Findings for wages
• Wage elasticity in bottom 10th is about .04 overall (ex: 50%
increase over minimum wage increases average wages of
this group by about 2 percent)
• But effect only appears for business assistance living wage
laws
• Wage effect appears too large to be plausibly attributed to
direct living wage effects for workers covered by
contractor-only living wage laws
• Further analysis suggests that the effects on wages come
from business assistance laws, which cover a larger share
of workers, and are harder to “game”
Findings for employment
• Employment elasticity for bottom 10th is about
–0.1 (ex: 50% increase reduces employment rate
by about 2 percentage points)
• Like for wages, disemployment effects only show
up for business assistance living wage laws
• Some evidence of positive employment effects
higher up in the wage distribution, consistent with
substitution towards higher-skill workers
Findings for poverty
• Results indicate some wage gains, but some job losses
• Looking at families, we can assess effects on poverty
• Evidence indicates that living wages are associated with
declines in urban poverty, with elasticities on the order of –
0.15 (ex: 50% increases poverty by a bit over 1 percentage
point)
– Contrasts with my work on minimum wages, which
target very different sets of workers
• Again, effects are associated with broader business
assistance living wage laws
Wages, employment, and poverty
• Given the wage increases and employment declines, results
imply that living wage effects are fortuitously distributed
across families so as to reduce poverty despite
disemployment effects
– This occurs, to some extent, because the employment
losses tend to occur for the lowest-skill workers, while
there are some employment gains for slightly higherskill workers
– The implication is that living wage deliver some
benefits, but not necessarily to those who are the very
worst off
Summary of evidence on effects of living
wages
• Positive wage effects for the least-skilled, although at the
cost of some employment
• Net effect is to reduce urban poverty
• “Mixed bag,” as this is not achieved by helping the lowestwage/lowest-skill individuals
• Poverty results do not equal endorsement of living wages
– Data more consistent with living wage achieving goal
of advocates
– Nothing in evidence indicates that living wages are best
way to achieve goal
“Puzzle” regarding living wage
movement
• Living wage laws are pitched as anti-poverty programs
– “Our limited public dollars should not be subsidizing
poverty-wage work.” (ACORN)
– “[T]he living wage is a crucial tool in the effort to end
poverty.” (Economic Policy Institute)
• Yet rather than mandate higher wages for all workers, a
curious feature of living wage laws is their frequently
narrow coverage of employers that are contractors or
subcontractors with the city, perhaps (not even) 1% of
workforce
Rent-sharing hypothesis
• Living wage laws may serve other interests, offering
protection of higher-paid municipal workers from lowwage workers, rather than offering protection for low-wage
workers
– In particular, by raising the wages that city contractors
must pay, living wage laws may reduce the incentives
for cities to contract out work that would otherwise be
done by municipal employees
• Stronger bargaining power for municipal unions
• Higher wages
Evidence on rent-sharing hypothesis
• Wages of lower-wage, unionized municipal
workers increased as a result of living wages
– Elasticities of average wages with respect to
living wages in the .1 to .15 range
• Evidence does not imply that living wages offer
no assistance to low-wage workers or low-income
families (restricting trade/workfare)
• Although most common type of living wage law
delivers gains only to unionized municipal
employees
Overall assessment
• Living wage movement has been an amazing success story
in terms of securing legislation
– Somewhat difficult to explain given overall
predominance of conservative agenda
• Economic research points to some of the expected costs of
living wages, and indicates that living wages may not be
the best means of helping the very lowest skill workers
• But the broader living wages laws have to some extent
delivered on the promise of reducing urban poverty
Challenges: looking ahead
• Tougher budget situation at state and local level since
period in which living wage movement took off
– No evidence, yet, that tougher economic times will lead
to retrenchment; living wages may simply become “part
of the landscape”
• Pres. Bush has proposed privatizing many federal
government functions (contracting out), which could pose
a huge temptation to the living wage movement, and likely
provoke intense opposition from the federal government