“Living” Wage or Market Rate?

By Neil Williamson, President

University of Virginia students, with the encouragement from a few faculty and City Councilors, at the  are currently protesting (including a hunger strike) to force the University pay a “Living Wage” of $13 to all its employees.

UVA FastFirst and foremost, we applaud the students for their activism.  While we do not share their views regarding this issue (more on this below) we admire their passion and determination.

Their emotion is compelling.

The problem is they’re wrong. And they should eat now.

Minimum_wageEconomic theory suggests absent significant revenue  increases, as labor costs increase the demand for labor will decrease resulting in higher unemployment.

The British economics chart to the left demonstrates this curve well.  If you place the words “Living Wage” in place of “minimum wage” you have an understanding of the impact. It is also important, as proven below, the smaller the gap between the two wage points the lesser the impact on the demand curve.

This concept is not lost on those who survive layoffs, in the private and public sectors, when they thankfully state “I now have three jobs for one check”

Back in June of 2004, Santa Fe, New Mexico instituted minimum wage floor greater than the Federal Minimum Wage in their locality.  The Employment Policy Institute  funded a study conducted by Dr. Aaron Yelowitz of the University of Kentucky.  This study used government collected data to examine how Santa Fe’s living wage increase impacted the labor market.

The end result is that the least skilled—people these ordinances are purportedly attempting to help—end up left out of the labor force.

For those that do keep their jobs, Dr. Yelowitz found that they end up working fewer hours than before. On the whole, the living wage ordinance reduced hours worked by 1.6 hours per week. Similar to the unemployment results, these hours reductions were felt most by the least-educated employees. Those with 12 years or fewer of education saw their hours reduced by 3.5 hours per week.

Overall, the results of this complete economic analysis show that the living wage in Santa Fe had an indisputable negative effect on the labor market. As a result of the increase in the wage floor, unemployment is significantly increased in the city and individuals who were able to keep their jobs are being forced to work fewer hours. Most troubling, though, is the fact that the least skilled employees are those who are being most hurt by this ordinance.

Earlier this year, Libertarian Law professor Richard Epstein penned an article entitled “The Hidden Dangers of the ‘Living Wage’”. His analysis suggests the “Living Wage” would be the labor battle both in the United States and Europe for the foreseeable future.  Professor Epstein correctly identifies the core issues regarding lower employment and harming the underclass.

… the implicit assumption of the minimum wage proponents is that these increases do not increase unemployment, so that the living wage law is just another extension of the good idea of transferring wealth to poorer individuals, but at a level that is far higher than the minimum wage increases of the second Bush presidency. . .

… this is not a small deal. When the minimum wage law was equal to $5.15, about 6.6 million individuals earned less than the $7.25 wage level. By 2010, after the wage level was increased, unemployment rates did move sharply upward.  Some of today’s workers will be lucky enough to ride the living-wage tide upward, but others are likely to be cast aside. The empirics on matters of degree are always up to debate, given the huge set of other regulations that hit labor markets. In principle, the law of demand says that as the wage demanded increases, the jobs offered will decline. Unless demand curves are flat, there must be unemployment effects. The only question is their magnitude. The imposition of a high minimum living wage will reduce, all other things being equal, the demand for labor.

Its exact effect is virtually impossible to tease out empirically because of two related factors. First, the key variable is the gap between the current market wage and the minimum wage. Where that gap is small, the minimum wage law will have a small effect. Where it is larger, it will have a large effect. The most ardent supporters of the minimum wage have to recognize that point, for otherwise they would raise the living wage level to $25, $50, or $100.

Writing back in 2002 when Durham, North Carolina just instituted its living wage policy, The John Locke Foundation’s Dr. Roy Cordato assessed the value proposition of employment:

The employer-employee relationship is one of value for value with both parties benefiting. From an employer’s perspective, wages represent the most significant, but not the only, component of the cost of employing someone. Other components include the employer’s share of Social Security and unemployment insurance and the cost of any health and retirement benefits. An employer will hire someone only if the total cost of hiring that person is less than the value, in terms of productivity, associated with the person’s labor. It makes no sense for any employer to do otherwise. If a private-sector company consistently hired workers whose output was not as valuable as the cost of hiring them, it would suffer losses and eventually go out of business. When a public-sector employer does the same, it is failing its responsibilities to taxpayers and confusing its role as a provider of assistance to the needy with its duty to provide services to the public as efficiently as possible.

On balance, the Free Enterprise Forum believes that the University of Virginia must satisfy its workers, customers (students, parents, and alumni), and funding sources (including the State) all the while remaining  competitive in the local labor market and the international higher education market.

As difficult as it may be, a mandated living wage, of any amount, does not provide the university with the flexibility required to meet their multiplicity of organizational goals.

Respectfully Submitted,

Neil Williamson

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20070731williamson Neil Williamson is the President of The Free Enterprise Forum, a privately funded public policy organization covering the City of Charlottesville as well as Albemarle, Greene, Fluvanna, Louisa and  Nelson County.  For more information visit the website www.freeenterpriseforum.org

Photo Credits: Huffington Post, Economics Online

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