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10.1177/1078087404269539 URBAN AFFAIRS REVIEW / November 2004Bartik / LOCAL LIVING WAGE

THINKING ABOUT LOCAL

LIVING WAGE REQUIREMENTS

TIMOTHY J. BARTIK

W. E. Upjohn Institute for Employment Research

This article reviews our knowledge about the living wage, a local government requirement that

employers receiving city contracts or economic development subsidies pay a living wage above

thefederalminimum wage.Morethan100localgovernments inthe UnitedStates haveadopteda

livingwage.The articleconcludes that moderate livingwage requirementsapplied to local gov-

ernment, and to contractorsand granteesemployees who are funded by the local government,

are the most likely to be beneficial. Living wage coverage for employers receiving economic

development subsidies are more likely to be harmful if the city economy is weak.

Keywords: living wage; local labor markets; minimum wage; economic development subsi-

dies; prevailing wage

Living wages, now adoptedby more than 100 local governments, require

employers that have some financial interaction with the local government to

paycovered employeesa living wage that is significantly abovethefederal or

state minimum wage. What are the likely effects of different types of local

living wage requirements? Should local governments enact living wagerequirements? If so, what design of a living wage policy makes the most

sense? These questions are addressed in this article.

Local living wage requirementsand a national minimum wage have simi-

larities.1 Both living wages and minimum wages mandate an increase in

someworkerswages.Both policiesmayreduce somegroupsemployment.

Local living wage requirements and federal and state minimum wages,

however, also have some differences, including the following:

269

AUTHORSNOTE:I appreciate helpfulcommentson earlier versions of this article fromSusan

Houseman, George Erickcek, Kevin Hollenbeck, the editors, and three anonymous referees. I

also appreciate the editing of David Nadziejka and the assistance of Claire Black and Linda

Richer.URBAN AFFAIRS REVIEW, Vol. 40, No. 2, November 2004 269-299

DOI: 10.1177/1078087404269539

2004 Sage Publications

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1. Local living wagesare much higher than federal or state minimum wages;thisincreases the odds that living wages may have undesirable employmenteffects.

2. Local living wage requirements directly affect a much smaller proportion ofthe workforce than the minimum wage, because living wages only cover em-ployers with financial dealings with the local government, whereas minimumwagescovermost employers. Thesmaller coverage of theliving wage impliessmaller benefits and costs. Living wages may, however, indirectly affect thelabor market by signaling employers about public attitudes toward business,wages, and the disadvantaged. The symbolism of living wages may affect de-cisions of employers that living wages do not officially cover.

3. Local living wage requirements are imposed by a local government that, inmost cases, has less clout in the labor market than state governments and thefederal government. Local living wage requirements must consider effects onthe mobility of employers, which is less of an issue for states or the federal

government.2

This article begins by discussing features of the labor market that influ-

ence the effects of living wages. I then analyze issues in the design of living

wage requirements, review research, and make policy recommendations.

THE ROLE OF WAGES AND THE ROLE OF EMPLOYERS

The rhetoric of living wage campaigns stresses the benefits of living

wages in reducing poverty. The assumption is that an important barrier to

reducing poverty is inadequate wages at entry-leveljobs.Themoral perspec-

tive of living wage campaigns is that it is unjust for many workers to be only

able to find jobs that pay poverty-level wages. Many living wage activists

view wages as determined by employers. It is immoral for an employer that

has theability to pay living wages to refuse to do so. The government should

not financially support an employer that enhances its profits by keeping

wages down, thereby increasing poverty.

These arguments simplify the living wage issue. This article will try to

develop a more complicated and nuanced view of the living wage issue. A

current understanding of the labormarket suggests several complicating fac-

tors in analyzing living wage policies:

Increased wages have surprisingly modest effects in reducing poverty.

Even if we assume that hikes in minimum wages have zero effects on

employment, simulations show that increases in the minimum wage reduce

povertyonlyslightly.

3

Forexample,simulations suggest that the1997 hike inthe minimum wage from $4.25 to $5.15 only reduced the number of persons

in poverty by 2% (Houseman 1998). Other estimates imply somewhat larger

270 URBAN AFFAIRS REVIEW / November 2004



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but still quite modest antipoverty effects of a minimum wage. For example,

simulations by Sawhill and Thomas (2001) suggest that an increase in the

minimum wage from $5.15 to $6.15 would reduce the number of persons in

poverty by about 4%.4

Higher wages have a limited effect on the poor because most of the poor

do not work full-time, full-year. Among the nonelderly poor, 43% have no

workers in the family during a typical year. Fifty-seven percent of the

nonelderly poor have at least oneworker, butonly in one-third of these fami-

lies do total work hours equal or exceed the equivalent of one full-time, full-

year worker (Bartik 2001, 37).

Higherwagesplay a largerrole in increasing theliving standardsof lower-

middle-class and working-class Americans. Simulations suggest that

although only 19% of the benefits of a higher minimum wage go to workersbelow the poverty line,5 48% of the benefits go to working families whose

income is between one and three times the poverty line (Burkhauser et al.

1996). The lower middle class and working class have more full-time, full-

year workers who can benefit the most from higher wage standards.

Many living wage advocates, as well as other Americans, would argue

that working-class and lower-middle-class Americans deserve assistance

from government policies.Living wage proponents have argued that thecur-

rent poverty line should be increased to better approximate a decent living

standard (e.g., Sklar et al. 2002). The point is, however, that higher wages

have significant limitations in helping the lowest income families among

needy Americans, who are families below theofficial poverty line. This sug-

gests exploring other antipoverty policies, such as policies to increase the

labor supply or labor demand for the poor (Bartik 2001). Advocates for theliving wage maynot dispute this point, but it is not highlighted in campaigns

for the living wage.

Whether an employer is a good employer cannot be judged solely by

wages. Wages are just one part of the employment package, which also

includes credentialand skill requirements, fringe benefits and good working

conditions, and training and career opportunities.

Employer A, which pays $7.50 per hour but hires workers whose creden-

tials in this local labor market usually lead to a $5.50 per hour job, is in some

sense a better employer than Employer B, which pays $10.00 per hour to

workers whose credentials typically lead to a $10.00 per hour job. Employer

A is paying what labor economists term a higherefficiency wagedifferential

than Employer B. Employer A may do so because of a belief that this higher

wage will increase profits by making it easier to recruit workers, loweringworker turnover, or increasing worker productivity. An employers lower

Bartik / LOCAL LIVING WAGE 271



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wages mayalso be offset by betterworking conditions, fringebenefits, train-

ing, or promotion opportunities.

Even if there is employer power over wages, government regulation of

wages faces limits in pushing wages up. The wages paid by an employer to a

particular worker maynot be rigidlydetermined by theworkers productivity

in the labor market but instead may be in part determined by that employers

wage policy. Although there is some room for an employers discretionary

policy to increase wages, however, forcing an employer to increase wages

too high will increase theodds that theemployer will take actions that may

have adverse effects on workers or society. Employers have many options in

responding to living wage requirements, and these possible responses must

be taken into account.

There isa long-standing beliefamong some labor economists,datingbackat least to Slichter (1950) and restated most recently by Krueger (2001), that

wages arenotstrictlydetermined by marketforces andemployershavesome

discretion in setting wages.6 Evidence consistentwith employer discretion is

provided by statistical analyses suggesting that similar workers are paid

widely different wages in different industries (Katz and Summers 1989;

Krueger and Summers 1988) and in different firms within the same industry

(Groshen 1991).

Several forces might contribute to employer discretion. Workers and

firms both invest significantly in the employment relationship (Doeringer

and Piore 1971) and as result will both be better off from continuing the rela-

tionship within some zone of wage indeterminancy. Higher wages may be

partly offset with lower business costs due to lower worker quit rates, easier

hiring, and higher productivity (Salop 1979; Shapiro and Stiglitz 1984),which will help expand thezone of wage indeterminancy. Worker ties to their

current firmsand imperfect information about other jobs maylead to upward

sloping labor supply curves facing individual firms, which gives firms the

market power to set wages at less than workers marginal productivity

(Bhaskar et al. 2002; Manning 2003). Workers may work more productively

if they believe that wages are fair (Akerlof 1982), and, as a result, changes in

notions of fairness may lead employers to find it in their interest to increase

wages. Higher profitability may increase the wage that is considered fair,

which may explain why industry profit rates have positive effects on wages

(Dickens and Katz 1987; Blanchflower et al. 1996).

But even labor economists who believe in employer discretion also

believe that there are limitsto how much higher wages can be pushed by gov-

ernment regulation without adverse results. Employers can respond to pres-sures for higher wages by not creating as many jobs or, in the case of local




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wage requirements, by not creating as many jobs in this location. Employers

can also respond to higher wage requirements by increasing the credentials

expected of new hires, reducing fringe benefits, degrading working condi-

tions, or cutting back on training. It is difficult for government to prevent all

of these possible responses. Therefore, government regulation of wagesmust

take into account that wage standardsthat aretoo high maybe evaded inways

that are social undesirable.

It is difficult to quantify how much an employers wages for a particular

worker can be increased without significant adverse reactions. Effects of

institutional factors on wages rarely seem to exceed 30%. The effects of

unionson wages,holding workercharacteristics constant, range from 20%to

30% (Freeman and Medoff 1984). The differences in profit rates across

industries are associated with long-run differences in industry wages, hold-ing worker characteristics constant, of 24% (Blanchflower et al. 1996).

Research on the market power of individual employers estimates that wages

might be 20% below marginal productivity (Bhaskar et al. 2002). Perhaps

living wage requirementswill be able to increase wages by more than 20%to

30%without adverse reactionsby employers, but such large effects would be

unusual among institutional influences on wages.

One could argue that this estimate of 20% to 30% flexibility in wages is

too generous. Union wage increases of 30% may result in a number of

adverse effects, such as increasing prices or decreasing employment oppor-

tunities for individuals with lower skills.7 Industries with higher profit rates

may differ from other industries, making it profitable for these high-profit

industries topayhigher wages. Differences across industriesin wagepolicies

do notnecessarily imply that raising wages beyondwhat firmsdo voluntarilywould be a neutral policy. Perhaps low-wage firms or industries are low-

wage because wage increases in these firmsor industries will notbe offset by

higher worker productivity or lower worker turnover and hiring costs.

Research on the market power of individual employers has not been exten-

sive enough to allow for definitive estimates of how much wages might be

below marginal productivity.

One could alsoargue that this estimateof 20% to 30% flexibility in wages

is toolow. Unionsarerelatively weak in theUnited States, which mayreduce

union wage effects below their maximum potential. One might think that

mandatorygovernment regulation coulddo moreto increasewagesthan rela-

tively weak U.S. unions. Some living wage advocates have argued that the

slow growth in U.S. wages relative to U.S. labor productivity indicates that

there must be room for sizable increases in wages: for example, according toPollin and Luce (1998, 40),




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Thefact that theminimum wage would be $11.20 in 1997 if low-wageworkershad received only an equal share of the economys productivity gains since1968no moreand no lessmakes certain that the productive potentialexistsin the economy of 1998 to sustain a significantly higher minimum wage.

(The mainstream economists response is that increases in average produc-

tivity need not imply similar increases in the marginal productivity of low-

skill workers; changes in technology andrelative supplyof low-skill workers

mayhavereduced therelative productivity andwage of low-skill workers.) If

socialnorms influencenotions of wage fairnessandhence thewage bargains

that employers will consider, it is hard to know how far changes in norms

might push up wages. Bewley (1999) documents through employer inter-

views that concerns about workermoraleplay an important role in determin-

ing employers decisions about pay. This confirms previous results from in-stitutional labor economics that worker morale and notions of fairness affect

wagerates. Bewley, however, commentsthatworkers frequently do notknow

what workers for other employers are paid, which limits the effects of work-

ers notions about a fair wage. He argues, Probably if there were clear and

precise market pay standards known to workers, below-standard pay would

severely damage morale (p. 87).

Despite these arguments, I would maintain that the risk of adverse effects

is greater if the mandated wage increase is more than 20 to 30% higher than

normal market wage rates. We have observed institutional forces that allow

wages to vary by 20% to 30% without destroying the economy or even the

firms involved. Assuming that wages can be mandated upwardby more than

30% requires an extrapolation beyond the available data.

Although thenotion that society may have an ethical obligation to ensure

adequate wages forall families is attractive, theobligationscreatedby living

wage regulations do not perfectly match this ethical rationale. Living wage

regulation imposes on employers with some financial relationship with gov-

ernment the obligation to ensure that families receive adequate wages by

requiring that these employees pay a minimum wage to all their workers. I

consider later the issues raised by the living wage only covering some

employers. But here I consider whether it makes sense for this obligation to

be imposed on employers and whether it makes sense for employers to be

obligated to pay this higher wage to all workers, not just those in need.

The ethical obligation to provide living wages may need to be paid for by

society as a whole, not just employers. Suppose a given worker can produce

$xper hour worth of goods and services for an employer that pursues a low-wage strategy, a higher $y per hour foran employer that pursues a high-wage

strategy, butan ethicallyacceptable standardof living for theworkers family




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requires a still higher wage of $z per hour. Although itmay be just todemand

thatemployerspursue a high-wagestrategy, it is doubtful whether employers

are ethicallyobligated to pay this worker $z per hour. This higher wage of $z

per hour reflects societys ethical beliefs about minimal living standards.

Someone must pay thedifference between what theworker canproduce ($y)

and the $z. This obligation should not fall solely on the workers employer.

Rather, this wage differential of $(z y) should be paid for by taxes allocated

by some fair basis. It is praiseworthy if the employer chose to lose money on

thisworker by paying them $z, but this act of charity isnot a moral obligation

of that specific employer.

In addition, living wages increase the wages of all workers, not just those

whose families are below a minimum living standard. In economists terms,

the living wage istarget inefficient. For example, as noted previously, esti-mates suggest that one-third of the benefits from a higher minimum wage

goes to working families whose income is more than three times the poverty

line.

In sum, living wages may impose more than their fair share of the social

obligation of adequatewages forall on employers, andthe resultingbenefit is

provided in part to groups that do not need higher wages. The groups that

properly owe and deserve higher wages under the ethical theory underlying

living wages arenot well matched to thegroups that actually pay and receive

benefits under living wages. Of course, few social policies are perfectly

matched to the ethical rationales for these policies. The issue is whether the

imperfections of living wage policy are quantitatively large.

THE DESIGN OF LIVING WAGE ORDINANCES

Living wage laws differ widely. These differences occur in four areas:

The required wage level

The employers and employees that are covered

How the living wage requirement is enforced

Whether issues of who is hired for jobs are addressed

Thewagesrequiredby local living wagesvary from a little more than $7 to

almost $15 per hour. The median living wage in 2003 for employers provid-

ing health insurance was $9 per hour, almost 75% greater than the federal

minimum wage of $5.15 per hour. Three-fourths of the living wage ordi-nancesseta higher minimum wage foremployers notprovidinghealth insur-

ance, or theordinances require healthinsurance coverage. Themedianliving




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wage requirement in 2003 for employers not providing health insurance was

$10.20 per hour.8

About three-fifths of current local living wage requirements cover only

service contractors to the local jurisdiction, one-tenth only cover employers

that receive economic development assistance, and one-third cover both.9

Most local living wage requirements for contractors or subsidy assistance

only coverfor-profit employers, butabout 30%also covernonprofit employ-

ers (Association of Community Organizations for Reform Now [ACORN]

2001). About one-fifthof local living wage requirementsalso cover the local

governments own employees.

For a covered employer, local living wages differ in which employees are

covered. Some living wage ordinances only cover employees funded by the

city contract, whereas others cover the entire company. Some living wageordinances cover all employees, but others exempt part-time or temporary

employees, or employees hired through government training programs.

Some local living wage ordinances cover not only the employer involved

with the city contract or subsidy but also that employers subcontractors or

tenants.

Local living wages also differ in how they areenforced. Some local living

wage laws have no specific provisions for enforcement, whereas other laws

authorize workers suits, the public disclosure of employer payroll records,

and sanctions for noncomplying employers.

A few local living wage requirements pushed by the living wage move-

ment are really local minimum wages. San Francisco, Santa Fe, and New

Orleans recently adopted local minimum wages (November 2003 for San

Francisco, February 2003 for SantaFe, and February 2002 for New Orleans,but the last was overturned by the Louisiana Supreme Court in September

2002) that apply to most local employers, regardless of their financial rela-

tionship with the local government. In November 2002, Santa Monicavoters

turned down a proposal to impose a minimum wage in the citys downtown

and coastal zone areas. Local minimum wages raise somewhat different

issues than the local living wages that are the focus of the current article.

Although living wage ordinances have been adopted by more than 100

local governments, no state government has yet adopted a living wage

requirement, although legislation is pending in at least 11 states (National

Conference of State Legislatures 2003). State governments that address the

issue of low wages do so through statewide minimum wages that cover most

employers. Eleven states, mostlyin theNortheast andon theWest Coast,cur-

rentlyhavestateminimumwagesthatarehigher than thecurrent federal min-imum of $5.15 (U.S. Department of Labor n.d.).Thesehigherstateminimum

wages aregenerally $1 to $2 above thecurrent federal minimum. In addition,




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31 stateshave little Davis-Bacon Acts that require that construction work-

ers on state-funded contracts be paid local prevailing wages; these acts are

similar to the Davis-Bacon Act, which applies to construction workers on

federally funded contracts.

APPROPRIATE WAGE RATES FOR LIVING WAGES

The higher the living wage relative to a jobs current wages, the more

likely the higher wage cannot be accommodated through lower turnover

costs,more training,or theemployers discretionary wage policy. As a result,

the higher the living wage, the more likely that a worker at this job with low

credentials will be replaced by a worker with high credentials (more educa-

tion or experience). This displacement may not always be due to a workerbeing fired but rather may be implicit in who is hired for a vacancy.

High levels of living wages will also raise employer costs. The higher the

living wage, the more difficult for higher wage costs to be offset with lower

turnover costs and higher productivity. For living wages that cover employ-

ees paid via city contracts or grants, a higher living wage is more likely to

increase contract andgrant costs.Forliving wages that cover thecontractors

employees who are not funded by the contract which means that these

employeeshigher wages cannot be covered through higher contract costs

higher living wages make it more likely that this contractor will avoid doing

business with the city.

For firms receiving economic development assistance, the higher the liv-

ing wage, the more likely it is to tip the firms location decision. Research

shows that within a metropolitan area, business location decisions areextremely sensitive to small costdifferentials, suchas those created by differ-

ences in property taxes (Bartik 1991a, 1991b, 1992 provide reviews; studies

in this area include Luce 1990; McGuire 1985; Fox1981;Wasylenko1980).

Proponents of a living wage sometimes argue that living wages cannot

have much effect on businesslocationdecisions because living wagesat most

increasebusinesscostsby1% (Pollin andLuce 1998).Butwithin a metropol-

itan area, a 1% extra cost could easily trigger a different business location

decision. Different locations within a metropolitan area offer similar access

to markets and labor, and thereforeare likely to be good substitutes, allowing

small differences in costs caused by living wage requirements or property

taxes to alter business location decisions. For example, the literature on the

determinants of intrametropolitan business location decisions suggests an

average elasticity of new business locationswith respect to theeffectivebusi-ness property tax rate in a jurisdictionof 1.76. (Bartik 1992). This elasticity

means that a 10% increase in the effective business property tax rate in a




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single jurisdiction within a metropolitan area, for example from 2.4% of

property value (the median effective property tax rate in leading industrial

states according to Fisher and Peters 1998, 121) to 2.64%, will reduce the

number of new businesses choosing that jurisdictionby more than 17%, with

most of these businesses locating elsewhere in themetropolitan area. Data on

average manufacturing payrolls and property values suggest that such an

increase in property taxes is equivalent to an increase in wages of only nine-

tenths of 1%.10 Thus, a very small percentage increase in wage costs in one

jurisdiction in a metropolitan area would be expected, based on research on

how business responds to property taxes, to cause a sizable percentage

decline in new business activity.

Perhaps small cost increaseshave such a large effect in part because a 1%

increase in costs causesa much greater percentage reduction in profits, giventhat profitmarginsare only a modestproportion of costs.For example,Peters

and Fisher (2002, 244-45) find that operating profits as a percentage of costs

in manufacturing havea medianof 12%, which implies that 1% extra in costs

would reduce profits by 8%.

Therefore, an evaluation of a living wage depends on how much the living

wage raises wages for covered employees relative to current wages. Living

wages are often more than 30% more than the federal minimum wage, but

current wages forcoveredworkerswouldusually exceedthe minimum wage.

Excessive living wages are more likely to cause worker displacement,

increased contract costs, and reduced business activity. The benefits of a liv-

ing wage also go up with a higher living wage, but the negative side effects

probably grow faster. For modest-sized wage increasesmandated by a living

wage, it is plausible that much of the increase will be absorbed by higherworker productivity, lower worker turnover andhiring costs, and lower prof-

its. At some point, mandated wage increases cannot be offset by other cost

reductions or absorbed by employers, and employers will increasingly take

more drastic actions that may impose steeply rising social costs, whereas

benefits will not increase as fast.11

COVERAGE ISSUES

Analysis of which workers to cover by living wages should consider both

ethical and practical issues. The ethical issue is that for some observers, the

obligation to increase thewagesof low-incomeworkers seemsmore compel-

ling the more directly the government is involved in those workers employ-

ment, according to the argument that the government should be a modelemployer. The practical issue is whether this group of workers can be




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effectively covered by local living wage requirements without excessively

adverse effects.

Why might we expect government to be a model employer? It could be

argued that before regulating others, the government should first get its own

house in order. In addition, the government has greater control over its own

operations and therefore can aim for loftier goals with fewer unintended

social costs than it is feasible to do in regulating the private sector.

Public employees. A local governments application of a living wage pol-

icy to itsown employeesfallswithin itsduties as an employer. The local gov-

ernment cannot avoid having some policy for paying its workers, and that

policy shouldconsider wage fairness. Higher wages mayincrease taxpayers

costs, but it is reasonable for taxpayers to pay some costs for government to

be a model employer. A local government applying a living wage to itselfcanreduce displacement by continuing to hire and train persons with low

credentials.

If higher living wages for government employees are not offset through

higher productivity, or through lower turnover and hiring costs, the cost of

providing local public services will increase. This may affect household

migration.

Contracts and grants. A living wage requirement for workers funded

through a contract or grant is an extensionof thegovernments responsibility

as an employer. Government contracts and grants both fund and define the

services to be performed. Thegovernment bears some responsibility forhow

these services areperformed, including thewages paid. Because theworkers

arefundedby thegovernment, highercosts will be borne by thelocalgovern-

ment through higher bids or lower services. Costs will only be higher if thehigher living wage is not offset by higher productivity or lower turnover

costs. Higher costs to local taxpayers may affect household migration.

One problem with contracts and grants is that it is difficult for local gov-

ernment to control a contractors or grantees hiring. Excessive living wage

levels for contractors or grantees may displace low-credential workers.

Economic development subsidies. A business receiving economic devel-

opment subsidies is notprimarilyprovidinga publicservice. The firm is pro-

ducing a good or service that is demanded by the market, but this production

may also provide social benefits. Presumably, the subsidy was offered to

increase social benefits such as more job opportunities, increased tax reve-

nue, or a better looking neighborhood. The government is not fully funding

the firm, and economic development subsidies will typically only be a mod-

est percentage of overall business costs or labor costs, probably less than1%.

12Whether living wages should be imposed on economic development




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subsidies is a pragmatic issue of what the local government can get away

with, given its economy and its competitors.

If a citys economy is weak and the subsidy is also provided by nearby

local governments, it is difficult for the city to impose a living wage require-

ment on this subsidy without significant social costs. In a city with a weak

economy and high unemployment, the social benefits of more employment

growth would be relatively great. As discussed in Bartik (1991a, ch. 8;

2004a), in a high-unemployment city, the average unemployed worker is

more in need of a job than the average unemployed worker in a low-unem-

ployment city. In addition, a high-unemployment city is more apt to have

underused infrastructure,whereas additional jobgrowth in a booming area is

more likely to increase the need for additional infrastructure. As already

mentioned, business location decisionswithina metropolitan area are quitesensitive to slight variations in costs. In addition, imposing a living wage

requirement on commonly used economic development subsidies, which

businesses take for granted, may symbolize an antibusiness attitude. Busi-

nesses may fear that such an attitude could lead to future problems, such as

conflictsover zoningor other regulatory issues. Forallthese reasons, impos-

ing a living wage requirement on business subsidies is likely to reduce the

citys business activity. Assuming that the rationale for economic develop-

ment subsidies is correctbusiness provides social benefitsthis reduced

activity would impose significant social costs.

In contrast, if thecitys economy is strong, then a living wage requirement

is arguablya reasonable wayfor a city toallocatescarcebusinesssitesamong

many businessprospects. This depends on an assessment of whether theben-

efits provided by attracting a business paying higher wages, rather than abusiness paying lower wages, are greater than possible social costs if the

higher wage business hires a greater proportion of higher skill workers. In a

low-unemployment city, it is more likely that higher wage businesses will

lower their hiring standards to find enough workers. Even if the living wage

requirement does reducecity employment growth, thesocialcosts of this are

relatively low in a low-unemployment city (Bartik 1991a, ch. 8; 2004a).

Alternatively, if thecitys economy is weak but thesubsidy is an add-on to

typical subsidies, the living wage requirement may be less costly then the

benefits provided by this add-on subsidy. The requirement and subsidy

together will reduce business costs. A new subsidy tied to a living wage

requirement is less likely to be interpreted as antibusiness. The new subsidy/

living wage package will probably increase the citys business activity.

Finally, the size of the jurisdiction enacting a living wage requirement foreconomic development subsidies makes a difference to the living wages

effects on business location. Economic theory suggests that the better the




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areas locational substitutes, the more sensitive business location decisions

will be to a change in an areas costs. Empirical results confirm this theory:

business location decisions across different jurisdictions within a metropoli-

tan area are far more sensitive to taxes than are business location decisions

across states (Bartik 1991a, 1991b, 1992). Among studies looking within a

metropolitan area, it is easier to find significant effects on business location

of tax differences across small suburban locations than tax differences

between the central city and the suburbs lumped into one group (Bartik

1992). Although different locations in the same metropolitan area are good

substitutes, locations in different states will offer very different access to

markets and labor, and larger changes in costs will be needed to alter a firms

choice of a state. Central cities, and suburbs as a group, may offer locations

with moderately different access to markets, types of labor, ambiance, andprestige,whereas different individual suburbs may be more interchangeable.

Therefore, increases in a central citys costs of business operationmaycause

a lesser percentage reduction in business activity than increases in business

costs in a small suburb.

As a result, state governments, and to a lesser extent large central citiesor

large urban counties, may be able to attach living wage requirements to eco-

nomic development subsidies with fewer consequences for attracting busi-

ness than similar living wage requirements adopted by a small local govern-

ment jurisdiction. The competitive situation of the jurisdiction may also

makea difference. Forexample, livingwagerequirements,or other measures

affecting business costs, mayhave greater effects in stateswhose major met-

ropolitan areas straddle state borders.

Some living wage supporters argue that if a business fails to pay a livingwage to all employees, the business is undesirable. For example, David

Reynolds asks the rhetorical question, Does the community really want to

attract firms whose main preoccupation revolves around paying low wages

without restrictions from local government? (Reynolds 2001, 85). But, as

argued above,whether a business is a good employer cannotbe judgedsolely

by whether itpays each of itsemployeesa living wage. Inaddition,some eco-

nomicdevelopment subsidiesare justified by fiscal benefitsor neighborhood

revitalization, even if employment benefits are slight.

When might the labor market benefits from local job growth be offset by

job growth that is too low wage? This issue can be addressed using results

from Bartik (1993). This report analyzed the effects on a metropolitan areas

labor market of changes in the metropolitan areas employment growth and

changes in theaverage industrywagepremium in themetropolitan area. Eachindustrys wage premium is the extent to which the industry in national data

tends to pay high or low wages compared to the educational and other




14/31

credentials of its workers. The average industry wage premium in a metro-

politan area is the weighted average of the industry wage premia in the area,

weighted using theshareof each industry in that metropolitanareas employ-

ment. The industry wage premiaarenormalized so that theweighted average

of the industry premianationally is zero. Theestimatesconsidereffects sepa-

rately for Whites and Blacks. Consistent with other research, the estimates

find that a 1% increase in a metropolitan areas employment increases the

real annual earnings of Whites by about 0.4% and Blacks by about 0.5%.13

These higher annual earnings are due to more unemployed workers getting

jobs, greater weekly work hours, and higher real wage rates. A metropolitan

areas average wage premia has a multiplier effect on local real earnings,

with a 1% increase in the average wage premia being associated with about

2.2% higher real annual earnings of Whites and about 6.2% higher realannual earnings of Blacks. These multiplier effects of the wage premium

appear to be due to both higher wage industries affecting wages in other

industries and higher wages drawing workers into the labor force.

These estimates imply that for an average metropolitanarea, 1% extra job

growth will negatively affect average real earnings if the added jobs have a

negative wage premium of greater than 9% in absolute value for Blacks

17% in absolute value forWhites.14 This seems to suggest that pursuing bad

jobs can easily produce negative results.Negativewage premium industries

do not, however, perfectly correspond to low-wage industries. Negative

wage premium industries havelow payrelativeto theskills andother creden-

tials required. An industry can have low or average pay and still be a high-

wage premium industry if it hires low-skill workers. Furthermore, themanu-

facturing industries that are the main target of economic development incen-tives tend to be positive wage premium industries. All thetwo-digit manu-

facturing industries except apparel and leather products are positive wage

premia industries.15 Even the textile industry, which is certainly a low-wage

industry, has a positive wage premium of 2%, because this industry tends to

hire many low-education workers. Other manufacturing industries have

quitelarge positivewage premia, for example transportation equipmenthas a

positive wage premium of 27%. Thelarge negativewage premium industries

are some of the retail and service industries, for example retail trade and

hotels both have a negative wage premium of 19%. Therefore, these results

do suggest that development strategies that focus on nonmanufacturing

industries that paylow wage premia, such as strategies focusing on attracting

regional retail centers or convention business, potentially could have nega-

tive effects on average real earnings.A local living wage requirement attached to economic development sub-

sidies might be one way to avoid such low-wage economic development




15/31

strategies. A living wage is, however, a relatively blunt instrument: it only

considers thewage,notwho is hired;it makesbusinesses ineligible fora sub-

sidy if a single worker is below the living wage; and it does not consider

growths otherpossiblebenefits,suchas helping the localgovernments bud-

get situation. A more nuanced way to allocate economic development subsi-

dies is to require a benefit-costanalysisbefore awardinglargesubsidies, with

the benefit-cost analysis required to consider both employment and fiscal

effects of the project (Bartik 2004b). Such benefit-cost analyses, however,

may be costly in money, time, and expertise, and therefore are more likely to

make sense for larger local governments.

Covering an entire employer or only workers financed by local govern-

ment. Living wage requirements that cover all employees at an organization

receiving a government contract or grantnotjust those working on thecon-tract or grantcannot be interpreted as the government fulfilling its respon-

sibility as a modelemployer. Workers financedby nongovernmental sources

arenot carrying outa governmental function.Rather, thecity isusing itsclout

as a contractor to influence the behavior of employers. Furthermore, the city

is using itsclout without financing theextracosts created by higher wages. It

isdifficult to increasea contracts costs tocover higherwagesforworkersnot

funded under the contract.

When will a city have enough clout to insist on living wages for workers

that it is not directly funding? If the city is financing a large percentage of a

contractors total workforce, the local government may be able to require a

modest living wage for thecontractors entireworkforce. If thecity only cov-

ers a small percentage of the contractors workforce, and the living wage is

high, the contractor will likely refuse to bid. A reduction in bidders mayincrease the citys contract costs or reduce the quality of contracted ser-

vices.16

Covering subcontractors. If living wages are applied to subcontractors

who do work financed via a contract or grant from the city, the city could be

viewed as having someemployerresponsibilitiesby funding anddefiningthe

services performed. The living wages benefits for the subcontractorswork-

ers must be weighted against potential displacement effects on workers with

low credentials and the costs to city taxpayers. For living wages applied to

subcontractors whose work is not funded by the contract or grant, the city

would typically lack sufficient clout to impose such requirements. Finally,

livingwagesapplied tocontractors of firms receivingeconomicdevelopment

assistance would be more difficult to impose if the citys economy is weak

and the economic development assistance is offered by the citys competi-tors. Because economic development assistance is often long term and a




16/31

firms contractors may change, applying the living wage to contractors may

result in perceived extra costs due to uncertainty.

Covering part-time and temporary workers, workers in job training, wel-

fare-to-work, or youth employment programs. Normal wages for these

groups will be lower. A uniform living wage requirement will exceed these

groups normal wages by a greater percentage, increasing displacement.

Lower living wage levels for these groups should be considered.

ENFORCEMENT ISSUES

At first glance, enforcing living wages seems easy. Enforcement requires

determining whether workers are paid the living wage, which is shown by

payroll records. A more complex issue is, however, determining who is cov-ered. Furthermore,a living wage campaign mightwant tominimizedisplace-

ment. To do so requires government intervention in hiringprocedures, which

is difficult. Finally, living wages have often been passed by activists over

the objections of city administrators. As a result, living wage advocates

may doubt whether the city administration will enforce the living wage

vigorously.

Because city administrations are often distrusted by living wage advo-

cates, many living wage laws require public disclosure of payroll and other

business records. Public disclosure is perceived by employers as an extra

cost. Many employers believe that public disclosure of wage and business

records could create morale problems among employees, help competitors,

or, for employers with cash-flow problems, cause suppliers or creditors to

make financial demands.Living wages applied to thecitys own workers areeasier to enforce. Fur-

thermore, if the city workforce is unionized, the union has an interest in

enforcement and the capability of analyzing the relevant payroll data. City

unions could also help enforce living wage requirements on contractors,

without public disclosure, by being given some role in monitoring

compliance.

HIRING ISSUES

Some living wage requirements, most notably in Boston and New Haven,

have been accompanied by some requirement that employers subject to the

living wage cooperate with city efforts to increase the access to jobs of city

residents. In BostonandNew Havens cases, employers were required to usecommunity hiring halls as a first source for new hires.




17/31

Prior to the living wage movement, many local governments have

required firms receivingeconomicdevelopment subsidies tomeetsomestan-

dards for hiring local residents. In many cases, such requirements have not

been enforced because of fears by local governments that such enforcement

will discourage the business growth that the local government is trying to

attract via the subsidy. Two exceptions to this rule are the Portland JobNet

program, now defunct, and the Berkeley First Source program. Both these

programs have had a more consistent influence on employers hiring deci-

sions by focusing less on the stick of revoking subsidies and more on the

carrot of helping firms find better workers. Under both programs, firms

receiving economic development subsidies from the city are required to

considernotnecessarily hireworkers referredby a city-funded agency

that works with the employer and community groups to find and train localresidents who can successfully meet the employers job requirements.

Because employers often have trouble finding productive workers for entry-

level jobs, theseprograms providea service that many firms find useful. The

programs on net might be an incentive to locate in the city.17

RESEARCH USING DATA ON

POSTENACTMENT EFFECTS OF LIVING WAGES

Most living wage research studies have been predictions of future effects

of proposed living wage laws. Some of these prospective studies find that the

living wage will provide benefits to workers and will only have modest

effects on employers costs (Pollin and Luce 1998; Reich et al. 1999;Reynolds 1999). Other studies analyze the possible negative effects of living

wages on labor demandfor less educated workers (Sander et al.2000; Tolley

et al. 1999). All such predictions are suggestive but not definitive, because

the predictions are based on implicit or explicit models, not on what actually

occurs after the enactment of living wage laws.

Only 11 studies have analyzed data on the postimplementation impact of

living wages.18 Three of these studies are of Baltimore, the first U.S. city to

implement a living wage requirement (in December 1994).19 One study

examines the Los Angeles living wage law, and another the Detroit living

wage law. Another study surveys living wage program administrators and

policy makersin 22 citiesor counties.Four studies authored or coauthored by

David Neumark use pooled cross-section and time-series data on economic

outcomes for workers in 21 to 29 cities (the number varies with the study)with living wages, compared with hundreds of other cities. Another study




18/31

critiques the methodology of Neumark and his coauthors, and reestimates

using similar data.

The three studies of Baltimore focus on whether the Baltimore living

wage law, which was limited to contracts, increased the citys contracting

costs, although these studies also consider effects on employment. The first

study, by living wage proponents, compared 23 contractsbeforeandafter the

enactmentof Baltimoreslivingwages (Weisbrot and Sforza-Roderick 1996)

and concluded there was no significant increase in the citys contracting

costs. Weisbrot and Sforza-Roderick also interviewed 31 companies with

contractsbeforeand after the living wage, and found that none of these com-

panies reduced staffing. A second study, by the Employment Policies Insti-

tute (1998), an opponent of minimum wages and living wages, criticized the

Weisbrot and Sforza-Roderick studys conclusions that costs did not go up,claiming that some data were erroneous. The reply by Weisbrot and Sforza-

Roderick to this critique is that correcting for these problems would not

change the conclusion that living wages did not significantly increase con-

tracting costs. Finally, a later study by living wage supporters examined a

larger number of Baltimorecontracts throughout a longer period and restric-

ted attention to contracts whose scope of services was clearly unchanged

(Niedt et al. 1999). This study also found no significant increase in Balti-

mores contracting costs dueto theliving wage. This study also provided evi-

dence from interviews with workers whose wages were increased by the liv-

ing wage. These workers reported little change in their work hours since the

enactment of the living wage and little change in the number of workers at

their workplace. These workers also discussed how the living wage helped

increase productivity and reduce worker turnover.Thelimitation of these studies is that measuringthetrue cost of contracted

services toa city isdifficult. Ideally, we would like todivide a citys total con-

tracting costs by the total real value of contracted services. These three stud-

ies focus on contracts providing similar services before and after the living

wage, but contracting costs per unit of service can also go up by keeping the

contracts costs thesameandreducingservices. A city mayhavelimited flex-

ibility in total spending on many contracts, either because funds are passed

through from state or federal grants or because city budget adjustments are

difficult. For such contracts, adjustingservices downward is themost plausi-

ble way in which the costs of services might increase due to living wages.20

By selectingcontractsin which services areunchanged, these studies maybe

selectingemployers with thesmallestcostincreases dueto thelivingwage.

Even if services might have been cut in some Baltimore contracts, thesethree studies suggest that Baltimores ordinance did not initially cause the

city significant financial difficulties. This lack of city financial impact may




19/31

not, however, be generalizable to all living wages because Baltimores law is

more limited than those for most living wages. Baltimores ordinance is lim-

ited to contractors, and, among contractors, only covers workers who are

directly financed through the contract. In addition, Baltimores living wage

in its first years was at modest levels ($7.55 in 2003 dollars) compared to

other citieshaving living wages,with no higher levelfor workers notcovered

by health insurance.

The Los Angeles study was based on interviews with city officials and

contractors (Sander and Lokey 1998). It provides anecdotal evidence on the

effects of the citys living wage on contractors, workers, employment levels,

and hiring practices, and the citys contracting practices and costs. There

were significant lags in fully implementing Los Angeless living wage, with

the ordinance as of 1998 only affecting 15 to 20% as many workers as pre-dicted. This is partly because some workers were still working on old con-

tracts. But it is duealso to city administrative practices that exempted60%of

new city contracts from the law, and to lack of compliance, with one-third to

two-thirds of covered employers not complying with the living wage. The

study finds that the living wage increases wages for some workers above the

living wage as employers try to maintain wage differentials. As for employ-

ment and costs, the study suggests that effects only occur for firms that have

many employees whose wages are forced up by the living wage. The authors

claim that they find instancesof allthe living wage effects claimed by propo-

nents andopponents: cost increases for some contracts, reduction in services

and employment decreases under other contracts, and some contracts in

which firms increase productivity to pay the extra costs. Among the ways in

which productivity increased is to hire more productive workers. The studydoes notquantifythe relative importance of thesedifferentadjustmentsto the

living wage. Adjustments take place the most when there is more scope for

choice: forexample,cost andservice adjustments take place more when con-

tracts are rebid, and changes in the mix of workers happen more through

attrition and hiring than layoffs.

The Detroit study focuses on the application of that citys living wage to

contracts with nonprofits (Reynolds 2000). The study is based on surveys of

64 nonprofits and interviews with a selected 15 of these 64. The surveys sug-

gest that a littlemore than one-thirdof thenonprofitsperceivea significant or

major impact of the living wage on their operations. The study focused the

interviews on nonprofits claiming significant or major impacts. On the basis

of these interviews, the study concludes that about one-third of those claim-

ing large impacts are mistaken due to a misunderstanding of the law or thesurvey. Some of the significantly affected nonprofits responded by service

cutbacks or layoffs, but the study concludes that these effects were minor.




20/31

One employer eliminated two part-time staff positions, and another stopped

hiring some area young people to do odd jobs. A few employers cut staff

hours. Two of the employers that had not yet implemented the living wage,

however, would have had to increase wages to a majority of their employees,

and the study concluded that these employers would have to cut staff num-

bers or hours if the city did not increase these organizations funding.

According to the study, one reason that Detroits law usually had modest

impacts is that the law did not cover workers at the nonprofits who were

funded by noncity sources. The study recommends that the city minimize

layoffs and service cutbacks in nonprofits by providing supplemental funds

to nonprofits forwhich theliving wage imposes costs that arelarge relative to

thenonprofits budget. Such a policy is estimatedto havemodestcostsfor the

citys budget.Elmore (2002) surveyedgovernment administrators and policy makers in

22 citiesor counties about the living wage, with government contractors cov-

ered in 18 localities and recipients of economic development assistance in 9

localities. He found only modest effects on government contracting costs for

a smallproportion of contracts. The survey suggested that one reason for the

limited effect is that many living wage requirements only cover contracts

larger than a relatively high contract size, and some industries (such as child

care) are sometimes explicitly exempted from living wage requirements.

Localities alsosometimesprovided special discretionary exemptions to con-

tractors that could argue the living wageimposed large burdens.

Elmore (2002) found that living wage requirements attached to economic

development programs usually had little effect. In manycases, theemployers

receiving economic development assistance already paid a living wage.Localities also provided waivers from living wage requirements for some

recipients of economic development assistance. In Oakland, living wage

requirements did create problems for the citys efforts to attract national

retailers. As Elmore notes, attracting national retailers is not a typical target

of economic developmentprograms.Only onecity, Duluth, reported that liv-

ing wage requirements might signal a poor business climate to businesses.

On the other hand, San Antonio indicated that the living wage requirement

hadhelped increasepoliticalsupport for economicdevelopment incentives.

Neumarks studiesare themosteconometrically sophisticatedresearchon

the living wage (Neumark 2001; Neumark andAdams 2003a,2003b;Adams

andNeumark 2003).Thesestudies pool cross-section andtime-seriesdataon

metropolitan areas from 1995 to 2000 (to 2002 in the latest study). Included

are 21 metropolitan areas that contain cities that implemented living wagelaws (29 in the latest study) and more than 200 other metropolitan areas. The

data used come from the Current Population Survey.




21/31

Neumark (2001) finds that living wage laws covering contractors have

significant positive effects on the wages of unionized local government

workers who earn less than the metropolitan statistical area (MSA) median

wage. The elasticity is 0.14 to 0.16, implying that a living wage 98% higher

than the minimum wage (the median living wage for employers not offering

health benefits is $10.20, 98% greater than the current federal minimum

wage of $5.15) will increase these workers wages by 11%.21 Neumark and

Adams (2003a) find that living wages have significant positive effects on the

averagewagesof allworkersin themetropolitanarea in thelowest10%of the

wage distribution, butonly after a lagof about a year. Theestimatedelasticity

is 0.05 to 0.07: a living wage 98% higher than the minimum wage increases

average wages of lowest-decile workers by 4%. The employment rates of

workers predicted to be in this lowest decile, however, also drop by a signifi-cant amount. The estimated elasticity is 0.14: a living wage that is 98%

higher than theminimum wage will reduce employment in this lowest decile

group by 9%. These wage andemployment effects on thebottom decile only

occur significantly for living wages covering economic development assis-

tance. Finally, Neumark and Adams (2003b) estimate that city living wages

significantly reduce the overall poverty rate in the MSA. The elasticity is

about 0.17: a living wage 98%more than theminimumwage will reducethe

number of poor people by 11%. These antipoverty effects are limited to

living wages that include economic development assistance.

A later study by Adams andNeumark (2003)gets slightlydifferentresults

by adding two moreyears of data. The elasticityof wages in the lowest decile

with respect to the living wage drops from 0.05-0.07 in the previous studies

to 0.04 and is statistically insignificant. The elasticity is, however, greater at0.06 and statistically significant for living wage laws covering economic

development assistance. The elasticity of the employment response to the

living wage in the lowest decile drops slightly in magnitude from 0.14 to

0.12. The elasticity of the local poverty rate with respect to the living wage

increases slightly in size from 0.17 to 0.18.

The magnitudes of some of these results are surprisingly large. As

Neumark and Adams (2003a) point out, a living wages effects should

dependon theproportion of workers covered. If 100% of allthe lowest decile

workers were coveredby the living wage, one expects an elasticity of around

1, in which a 98% increase in the living wage would raise these workers

wages by 98%. But estimates suggest that, out of all workers in the bottom

quartile of wages, living wages cover less than 1% (Neumark and Adams

2003a). Theelasticity of theseworkerswages with respect to theliving wageshould be around 0.01. But Neumark and Adams estimate an elasticity of




22/31

0.05 to0.07, about six times larger than our expectation based on the share of

workers whose wages are directly raised by living wages.

The estimated antipoverty effects of living wages are greater than

expected for similar-sized increase in the minimum wage. For example,

Houseman (1998) suggests an elasticity of poverty with respect to an

increased minimum wage of 0.1, even if a higher minimum wage has zero

effects on employment.22 Sawhill and Thomass (2001) results suggest

an elasticity of poverty with respect to an increase in the minimum wage of

0.2.23 These elasticities for the minimum wage are similar in size to

Neumark and Adamss (2003a) elasticities for the living wage. This is sur-

prising, because the living wage directly covers far fewer workers.

Neumark andAdams (2003a) suggest that thesurprisingly large effectsof

living wages can be explained by the potentially large number of employersthat receive economic development assistance. I am skeptical of this argu-

ment, because large economic development subsidies typically only go to

new and expanding manufacturing companies. New or expanding manufac-

turers are a small share of the labor market and pay high enough wages that

few workers would be affected by living wages.

Neumark and Adamss results might be due to living wages causing large

changes in social norms or being associated with political movements that

contribute to a change in socialnorms. As Adams andNeumark (2003) point

out, it is impossible to statistically separate the effects of a living wage from

the effects of the political movement that led to the enactment of the living

wage. Changes in social norms about fair wages could potentially push

wages up for many noncovered workers. To explain the poverty results,

assume that changes in social norms lead employers to diversify their hiringto high-poverty groups. Living wages may reduce overall employment, but

high-poverty groups would be substituted for other low-wage workers.

An alternative explanation of Neumark and Adamss results is that they

arebiased by unobserved city trends. Living wageswere adopted inmany cit-

ies in the mid- to late 1990s. Most living wage cities in Neumark and

Adamss sampleare largercities in theNortheast andCalifornia (16of 21 cit-

ies). Such cities may have benefitted more from the late-1990s boom. The

latest study by Adams andNeumark lessens this criticism, because it consid-

ers a longer time period and more cities.

Neumark and Adamss work has been critiqued in a paper by Brenner

et al. (2002), and responded to in part of the paper by Adams and Neumark

(2003). It would take toolong to fullyexplore this critiqueandresponse.Fur-

thermore, many of these disagreements could only be settled by independentwork using additional data and a variety of models. Brenner et al. argue that

interviews suggest that the business assistance component of living wage




23/31

laws is rarely enforced; Adams and Neumark argue that this is not so based

on their interviews. Brenner et al.present some estimates that theAdams and

Neumark results aresensitive to includingsubminimum wage workers andto

trends in Los Angeles; Adams and Neumark argue that other estimates sug-

gest that this is incorrect.24

THE POLITICAL LESSONS FROM

THE LIVING WAGE MOVEMENT

Whateverthe living wages economic merits, the living wage is a success-

ful political strategy. In city after city, the living wage has mobilized a coali-tion of labor unions, community groups, and religious organizations around

issues of wages and poverty. This coalition has been able to win public sup-

port, as evidenced by the victory of living wage campaigns in many public

referenda and the ability to persuade many city councils to adopt living

wages. Such coalitions can then influence city policy on other poverty-

related issues. As oneproponent of living wages said after Bostons adoption

of the living wage, In Boston, the mayors office wouldnt return our calls

last year, and now were in regular meetings (Swope 1998, 25).

Why have living wage campaigns been so politically successful? The

focus on wage rates shifts the debate away from whether the poor want to

work to whether thepoor haveadequate wage opportunities. As noted by one

advocate for living wages, in Minneapolis the campaign for living wages

came about in part as a way to refocus the debate away from the problem ofbiggovernmentto theproblem of bigcorporations(Peterson2001-2002,

49). Higher wage rates is also an issue that a broad constituencyof the public

can relate to, because many workers have at some point felt that their wages

were unfairly low. Unlike many antipoverty programs, living wage require-

ments do not explicitly require increased government expenditure. This is

also true of minimum wages, but living wages imposes higher wage require-

ments foronly a narrower group of employers, which reduces theintensity of

the political opposition.

It is clear that for many living wage advocates, local living wage require-

ments are regarded as a successful tactic of the moment, to be expanded to

broader issues that might have more major effects on reducing poverty or on

affecting the power of business. Many living wage advocates agree that liv-

ingwage laws have limited effects by themselves in their direct economic ef-fects in reducing poverty. As Erik Peterson, a living wage activist from

Minnesota, writes,




24/31

Living-wage and corporate-accountability opponents often charge that suchlaws arent really effective in achieving what they aim to achieve. The answerto this charge depends on what we think the goals of the movement are. If ourgoal is limited to raising the wages of specific types of low-wage workers, agrowing body of evidence suggests that tax changes, like the Earned IncomeTax Credit, are likely more effective than passing local living wage laws. Onthe other hand, if our goal is to build a movement that offers a chanceto challenge corporate power and the economic inequities that go alongwith suchconcentrated power, living-wage and corporate-accountability cam-paigns have initiated some provocative challenges. . . . If we see living-wageandcorporate-accountability lawsasends in themselves, weare nearing a deadend. But . . . if we see such laws as tactics in a larger struggle, then we are at apoint in thestruggle where we must take a complex andstrategic look at wherewe want to go next. (Peterson 2001-2002, 76-77)

Many living wage advocates clearly are trying, when possible, to expand

their efforts to promote citywide minimum wages and higher state and fed-

eral minimum wages, and to go beyond that to broader changes in govern-

ment policy toward business andpoverty. Therecentcampaigns forcity min-

imum wages in New Orleans, Santa Monica, Santa Fe, and San Francisco

may be the first wave of these political efforts.

CONCLUSION

What should local governments do about the living wage? In answering

this question, we should recognize thedifficulty of identifying other feasible

local policies to increase theearningsof lower incomefamilies. Training isoften proposed as an alternative, but training is expensive andusually results

in modest returns per training participant. We could leave income distribu-

tion to the federal and state governments, but this may be a recipe for inac-

tion. On the other hand, the need to do something about poverty and low

wages does not justify adopting living wage requirements if their design or

the citys circumstances imply that the living wage will reduce the earnings

of lower income families.

Basedon theory and research,moderate livingwagerequirementsapplied

to the local governments own employees, and contractors and grantees

employees who are funded by the local government, are the type of living

wage that is most likely to be beneficial in most cities. The requirements

should not try to push wages up by too much compared to market wages,

because too high a living wage leads to a high risk of displacement. Livingwages should be accompanied by policies to train lower income city resi-

dents for job openings in the city or with contractors. Living wage require-




25/31

ments shouldnotbe applied to a contractors or grantees employees whoare

not city funded. For these employees, the city in most cases has neither the

clout to insiston higherwagesnor thefinancing to help payforhigher wages.

Finally, city unions should play a role in enforcing living wage requirements

for city employees or contractors. This allows for effective enforcement

without full public disclosure of payroll records.

The merits of living wage requirements for recipients of economic devel-

opment assistance depend on the local economys strength and whether this

assistance program is used by thecitys competitors. If thecitys economy is

weak, living wage requirements should only be used if the economic devel-

opmentprogram isanadd-ontocommonly used economicdevelopment pro-

grams, so that the economic development program plus the living wage

requirement provide a net competitive advantage for the city. Living wagerequirements applied to normal economic development assistance programs

used by many nearby competing jurisdictions are likely to reduce the citys

economic growth, which is a serious problem if thecitys economy isalready

weak. If thecitys economy is strong, however, a living wage requirement for

normal economic development assistance maybe a useful part of a managed

growth policy.

Research on living wages should be strengthened. We need both more

detailed postenactment case studies and econometric studies that compare

living wage and nonliving wage cities with better controls for other city

characteristics.

Finally, whatever ones position on the living wage, we need to consider

the ethical challenge posed by the living wage issue: how can local govern-

ments creatively respond to the problems of low wages and poverty? Livingwage advocates have proposed one solution that even they admit is inade-

quate. Both proponents and opponents of living wages have an interest in

developing localgovernment policies thatmight reduce povertyand increase

wages while avoiding the drawbacks of living wage requirements.

NOTES

1. Other wage regulation laws that might be compared with living wage laws are the Davis-

Bacon Act, little Davis-BaconActs adoptedby 31 states (Azari-Rad et al. 2003), and the Ser-

vice Contract Act. The federal Davis-Bacon Act requires that construction workers on federal

contractsbe paid at least thelocalprevailing wage fortheir occupation.Thisprevailingwageis

either thewage paid a majorityof theworkersor, if there is no such wage, theaveragewage paid

for that occupation in the local labor market. The wage paid a majority of the workers is fre-

quently the unionscale wage.Little Davis-Bacon Actsapplysimilar prevailing wageminimums

to state governmentfunded construction. The Service Contract Act requires that private




26/31

employers providing services under federal contracts pay their service employees at least the

local prevailing wage, which is usually the median local wage for the occupation. In addition, a

successor contractor must pay its employees no less than the wages and fringe benefit levels

that were either paid or agreed to under a collective bargaining agreement of its predecessor

contractor. These laws are similar to living wage laws in tying some minimum wage require-

ment to financial involvement with the government. In some cases, these target wages increase

wageson governmentcontracts. Onthe otherhand,thetarget wage is notlinkedto some standard

of adequacy. Furthermore, these laws have usually not been adopted by local governments,

although local governments may be required to follow these rules when receiving intergovern-

mental grants. There is much research on Davis-Bacon and the SCA, and considering all this

research lies beyond the scope of the current article. For more on Davis-Bacon, see Whittaker

(2002) or Kessler and Katz (2001); for more on the Service Contract Act, see Goldfarb and

Heywood (1982).

2. Thus, statewide living wages should be analyzed differently than local living wages,

because employers areless mobile acrossstate boundaries than acrosslocal government bound-

aries. As explored further below, the analysis of living wage requirements attached to economicdevelopment assistance depends on the strength of mobility responses,which will depend on the

size of the jurisdiction imposing the living wage.

3. If an increasedminimum wage reduced work hours forsome poor individuals,this would

lessen the impact of a higher minimum wage in reducing poverty. For example, an article by

Neumark and Wascher(2002) estimates that an increase in the minimum wage will increase the

flow of nonpoor families into poverty (presumably by reducing work hours) by more than it

increases theflowof poorfamiliesout ofpoverty, althoughthe differenceis statisticallyinsignifi-

cant. In contrast, other work suggests that the disemployment effects of the minimum wage do

not eliminate its antipoverty effects. Card and Krueger (1995) estimate that an increase in the

minimum wage from $3.35 to $4.25 has about the effect in reducing poverty among minimum

wage workers as one would predict based on simulations without any disemployment effects,

which amountto about a 4% reductionin theoverall numberof persons in poverty. Addison and

Blackburn (1999) estimate that an increased minimum wage reduces poverty among teenagers

and junior high school dropouts. Sawhill and Thomas (2001) simulate an increase in the mini-

mum wage with disemployment effects among teenagers and conclude that an increase in theminimum wage from $5.15 to $6.15 will reduce the poverty rate from 12.2% to 11.8%.

4. This simulation by Sawhill and Thomas (2001) also allows for some modest disemploy-

menteffectsof theminimum wageon teenagers.If thesedisemploymenteffectswere eliminated,

to make the simulation more comparable to Housemans (1998) simulation, the antipoverty

effects of the minimum wage would be stronger. It is unclear why Sawhill and Thomass esti-

mated minimum wage effects in reducing poverty are larger than Housemans. Sawhill and

Thomas take accountof the earnedincome tax credit (EITC), whereas Houseman does not. The

EITC providesup to a 40% subsidy to earnings for some families, and this may provide amulti-

pliereffect of a minimum wage increase. In addition, Sawhill and Thomas use data from the

March 1999 Current Population Survey (CPS), whereas Houseman uses data from the March

1994 CPS. Work among the poor probably increased from 1993 to 1998.

5. Given that these working poorare only 6% of all workers, this group receives proportion-

ally three times as much benefits from a higher minimum wage as the average worker; still, the

overall benefit percentage for the working poor is modest.

6.Kaufman(1994) provides a textbookdiscussionof such issuesand a review ofthe relevanthistorical literature.

7.Theliteratureon unionwageeffectstries to holdworkercharacteristicsconstant, butit can-

notholdconstantworker characteristics thatare unmeasured.Evenif this research could hold all




27/31

worker characteristics constant, a shift to higher skill workers may hurt employmentopportuni-

ties for lower skill workers.

8. These figures are calculated by the author using the list Living Wage Successes, pre-

pared bythe LivingWage Resource Centerof ACORN(ACORN,n.d.). This siteincludesliving

wage ordinances asrecentas October 2003,and much ofthe informationfor individualcitiesand

counties was updated as of August 2003.

9. Calculated by the author from the Living Wage Resource Center (ACORN, n.d.).

10.Peters andFisher (2002)get the result that the average wage perworker across16 manu-

facturing industries is about $26,000, and average plant and equipment per worker is about

$101,000 (244-45, Table A.1).

11.In a model of a binding minimum wage in a perfectlycompetitive labor market, it is well

known that thewelfare loss triangleassociated with the minimum wage would rise with the

square of the differential of the minimum wage from the market wage. As the minimum wage

increases above the market wage, employment decisions are more and more distorted. In a

monopsony model, a minimum wage of a modest amount will have social benefits, but as the

minimum wage becomes higher, it likelywill havecostsexceeding benefits.The effects ofmini-mum wages with imperfect competition in the labor market are analyzed by Manning (2003).

12.Bartik (2001,251)discusses estimates that annualeconomicdevelopment costs forstate

andlocal governments might have been $32billion annually in 1999, around0.3%of U.S. GDP

and0.6%of total employee compensation. Petersand Fisher(2002)calculatethatthe mean pres-

ent value of incentives per job created, using a 10% discount rate, was $2,608 in 1998. This is

equivalent to an annual subsidy per job created of $261, a small percentage of employee

compensation.

13.The studylooksat real earnings andthuscontrolsfor greaterincreases in local pricesdue

to local growth.

14. To calculate this figure for Blacks, solve forxin the equation 0.547 + 6.202 (.01)x =0,

where 0.547 is the coefficient on employment growth, 6.202 is the coefficient on the wage pre-

mium, and .01 is the share of new jobs. These estimates assume that the areas original average

wage premia is zero; otherwise, replace xwith (xp), wherepis the original average wage

premia.

15. The apparel industry has a negative wage premia of 12%, and the leather industrysis 6% (Bartik 1993, 32). These industry wage premia are originally taken from Krueger and

Summers (1988, Table II).

16. It is interesting that under the Davis-Bacon Act and the Service Contract Act, prevailing

wage requirements only apply to workers on projects financed by federal dollars, not on all the

contractors projects.

17. For more on Portland JobNet, see Bartik (2001, 257-58). Bartik (2004a) provides a

description of Berkeleys First Source program. Bartik (2001, ch. 3) provides a review of the

many information problems in the low-wage labor market that cause many hiring decisions to

have a poor outcome.

18. The effects on public sector costs and hiring practices of Davis-Bacon and little Davis-

Bacon laws, which set prevailing wage laws for government construction contracts, have often

been studied; recent studies include Kessler and Katz (2001), Whitaker (2002), and Azari-Rad

et al. (2003). Reviewing these results is beyond the scope of the current article. Suffice it to say

that for Davis-Bacon, as for living wages, the conclusions of different researchers are quite

divergent.19.A fewcities hadlaws similarto livingwages before1994.Then

Documents

Urban Affairs Review 2004 Bartik 269 99