Jon Gertner, "What is a Living Wage? If It Happened in Baltimore, Maybe It Can Happen Anywhere." New York Times Magazine, 1/15/06

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For a few weeks in the summer of 1995, Jen Kern spent her days at a table in the Library of Congress in Washington, poring over the fine print of state constitutions from around the country. This was, at the time, a somewhat-eccentric strategy to fight poverty in America. Kern was not a high-powered lawyer or politician; she was 25 and held a low-paying, policy-related job at Acorn, the national community organization. Yet to understand why living-wage campaigns matter - where they began, what they mean, and why they inspire such passion and hope - it helps to consider what Kern was doing years ago in the library, reading obscure legislation from states like Missouri and New Mexico.

A few months earlier, she and her colleagues at Acorn witnessed an energetic grass-roots campaign in Baltimore, led by a coalition of church groups and labor unions. Workers in some of Baltimore's homeless shelters and soup kitchens had noticed something new and troubling about many of the visitors coming in for meals and shelter: they happened to have full-time jobs. In response, local religious leaders successfully persuaded the City Council to raise the base pay for city contract workers to $6.10 an hour from $4.25, the federal minimum at the time. The Baltimore campaign was ostensibly about money. But to those who thought about it more deeply, it was about the force of particular moral propositions: first, that work should be rewarded, and second, that no one who works full time should have to live in poverty.

So Kern and another colleague were dispatched to find out if what happened in Baltimore could be tried - and expanded - elsewhere. As she plowed through documents, Kern was unsure whether to look for a particular law or the absence of one. Really, what she was trying to do was compile a list of places in the U.S. where citizens or officials could legally mount campaigns to raise the minimum wage above the federal standard. In other words, she needed to know if anything stood in the way, like a state regulation or court decision. What she discovered was that in many states a law more ambitious than Baltimore's - one that didn't apply to only city contractors but to all local businesses - seemed permissible.
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I first met Kern on a sunny morning in late September in Albuquerque, a city of 4770,000 that made her list when she was working in the Library of Congress 10 years ago. She was now, at age 35, campaigning for a ballot initiative that would raise the minimum wage in the city to $7.50 an hour from $5.15. There was no face for the placards, no charismatic presence to rally the troops at midnight or shake hands at dawn outside 7-Eleven. Instead, there was a number, $7.50, a troop of campaign workers to canvass the neighborhoods and an argument: that many low-wage workers were being paid poverty wages. That a full-time job at the federal minimum rate added up to $10,712 a year. That local businesses could afford the pay raise. And that it was up to the voters to restore balance.

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What do you think?

[ 15 January 2006: Message edited by: robbie_dee ]

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It's worth making the distinction between wages and income here.
A Guaranteed Annual Income (GAI) scheme would top up the incomes of those who work for low wages. Unlike the current welfare system, it wouldn't penalise people for wanting to work (welfare recipients often face marginal tax rates of over 100% under existing rules). And unlike a minimum wage, it wouldn't eliminate jobs, either.

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I'll expand a bit.

The NYT piece mentions the Card-Krueger study, which claimed that minimum wages didn't affect labour demand in the case they studied. I'm not a labour economist, but I've talked with some of my colleagues who are, and my impression is that their results are simply not convincing enough to throw out all the other studies in the literature that find the opposite result (a quote from one of my colleagues: 'they had a shitty control').

In the short run, minimum wages may not have a significant effect on labour demand, but the long-run effects are much stronger. I think I mentioned elsewhere that one of the consequences of higher minumum wages in France is the automation of jobs that are done by (low wage) workers here. The social consequences of permanently excluding marginal workers from the labour market are worrisome. (I'm not going to make the crude argument that they caused the recent wave of riots in the banlieues, but high youth unemployment in those areas certainly didn't help).

But even if there are some negative labor market effects to raising the minimum wage, maybe those need to be balanced against other considerations. A living wage does improve the income and standard of living for those who receive it. It can also bid up wages for many other low and middle income people who earn more than the legal minimum, helping a broad swath of people at the lower end of the economic ladder. If corresponding negative effects are relatively small, and there are other policy options for dealing with those who experience them, maybe the benefits of a living wage policy outweigh the costs. Particularly if a living wage policy can actually be implemented, while other antipoverty programs like the GAI, although preferred by many mainstream economists, never get implemented.

[ 15 January 2006: Message edited by: robbie_dee ]

And the 'wage structure' argument suffers from the same problem. Wage increases that aren't associated with corresponding increases in labour productivity will lead to reductions in employment.

[ 15 January 2006: Message edited by: Stephen Gordon ]

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Originally posted by robbie_dee:
Particularly if a living wage policy can actually be implemented, while other antipoverty programs like the GAI, although preferred by many mainstream economists, never get implemented.

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Originally posted by Stephen Gordon:
Card-Krueger (and there may be a few others) are only a small percentage of the many, many papers on this issue: virtually all the others contradict them.

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That's not my recollection at all. My recollection was that there were papers empirically showing a *weak* negative effect on employment, but it was actually the doom and gloomsayers who were the "thin reeds." Of course, doom and gloom is what the theory predicts, so if the evidence contradicts the theory, it wouldn't surprise me if some economists (I'm not pointing any fingers) would rather quibble with the evidence than question the theory.

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And the 'wage structure' argument suffers from the same problem. Wage increases that aren't associated with corresponding increases in labour productivity will lead to reductions in employment.

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Only if you have a competitive labor market. If there are strong monopsonistic characteristics to the labor market, then an externally mandated increase in the prevailing wage rate may actually *increase* employment. Given that many "living wage" ordinances are targetted at government contractors, I don't think you should dismiss the monopsony scenario out of hand. It's also possible that labor markets are characterized by pervasive information problems that make the marginal productivity of labor difficult to determine, leaving wage rates and MPL only very loosely tied together and labor demand relatively inelastic to changes in the wage rate. If that's the case, then the wage gains to the beneficiaries of the living wage may far exceed any negative employment consequences, and those negative consequences that do occur might be dealt with in other ways, like unemployment insurance.

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In any other field, progressives would be offended at the suggestion that they should roll over, set aside their preferred policy option

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Um, no, compromise is usually the centrepiece of progressive politics for all but the most sectarian fringe groups. I'd rather establish worker control of the means of production rather than win a piddly minimum wage increase any day, but I am not going to sit on my ass and wait for the revolution to come when real people need money to live on now. A living wage is an achievable goal right now. Some other policies are not. They might be things to build for in the long term, but that's kind of a different issue.

[ 15 January 2006: Message edited by: robbie_dee ]

Here's a study that documents this effect using Canadian data.

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Given that many "living wage" ordinances are targetted at government contractors, I don't think you should dismiss the monopsony scenario out of hand.

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Originally posted by Stephen Gordon:
Again, the short-run effect on employment may well be small or insignificant. But if this reduces the profitability of firms that hire low-skilled workers, then the the long-run effect will be much more important.

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Maybe we don't mind driving low-wage employers out of the market. Part of the "moral" point is that work is something often closely tied to human dignity. Many low-skill, low-wage jobs are also lacking in that department. If a living wage campaign is connected to a broader political project that includes generous unemployment insurance benefits and training opportunities for higher-skilled employment, maybe we don't have to worry about the long-run consequences so much. Maybe the long run consequences would actually complement (or at least, not sabotage) our other policy goals.

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I'm tempted to [dismiss arguments about non-competitive labor markets], but if you have some evidence at hand, I'm willing to consider revising my opinion.

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I don't have any examples on the government contractors point, although if you have any extra grant money lying around, I've always thought this might be an interesting area for research.

The article does provide a related example, though:

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The plaintiffs - the New Mexicans for free enterprise - were not unsympathetic: the restaurateurs who took the stand, like Rob Day or Elizabeth Draiscol, who runs the popular Zia Diner in town, opened their books to show that their margins were thin, their costs high, their payrolls large. They cared about their employees (providing health care and benefits), trained unskilled workers who spoke little or no English, gave regular raises and paid starting salaries well above $5.15. They had built up their businesses through an extraordinary amount of hard work. Draiscol testified that her restaurant, for instance, had $2.17 million in annual revenue in the fiscal year of 2003. Though her assets were substantial - a restaurant can be valued at anywhere from 30 to 70 percent of its annual revenues, and Draiscol said Zia had been appraised at 66 percent of revenues, or about $1.4 million - she earned a salary of $49,000 a year. Draiscol testified that the living wage would raise her payroll, which accounted for 55 to 65 employees (depending on the season), by about $43,192 a year. Rob Day put the expenses of a living-wage increase even higher. In addition to labor costs, he estimated that the price of goods would go up as his local suppliers, forced to pay employees higher wages themselves, passed along their expenses to the Santa Fe Bar and Grill.

Rosdeitcher showed that the restaurants had made serious errors overestimating their costs. Still, the increase in expenditures was not negligible. Over the past few years, a variety of experts have tried to perfect the science of predicting what will happen to a community in the wake of a minimum-wage change, and one of those experts, Robert Pollin, a professor of economics at the University of Massachusetts, Amherst, served as the expert witness on behalf of Santa Fe. Pollin projected that the living wage would affect the wages of about 17,000 workers. About 9,000 of those workers would receive raises because of the ordinance, he said; the rest would receive what he called "ripple effect" increases - which meant that those making, say, $8.50 or more before the raise would most likely receive an additional raise from their employers to reflect their job seniority. Pollin calculated that wage increases would cost businesses a total of $33 million. And to pay for those amounts, restaurants and hotels and stores would probably need to raise prices by between 1 and 3 percent. The question, therefore, was whether business owners were willing to raise prices or make less in profits. In the trial, Pollin cited an obscure 1994 academic experiment in which several economists had set a different price within the same restaurant for a fried-haddock dinner. In varying the price of the haddock between $8.95 and $10.95, the researchers' goal was to find out whether variations in cost affected demand in a controlled environment. As it turned out, they didn't. Customers ordered the haddock at both $8.95 and $10.95.

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I understand that this is not an example of monopsony, but rather, more like a monopoly rent in the final product market that gets appropriated by the workers. But as between the customers of Santa Fe restaurants (many of which are quite upscale) and the low paid workers who toil there, I don't necessarily have a problem with letting the diners bear the burden of the higher wages.

[ 15 January 2006: Message edited by: robbie_dee ]

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If a living wage campaign is connected to a broader political project that includes generous unemployment insurance benefits and training opportunities for higher-skilled employment, maybe we don't have to worry about the long-run consequences so much.

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I would agree with that. My objection is the possibility that marginal workers would be permanently excluded from the job market. Making them 'less marginal' is definitely the best option.

[ 15 January 2006: Message edited by: Stephen Gordon ]

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Originally posted by Stephen Gordon:
My objection is the possibility that marginal workers would be permanently excluded from the job market. Making them 'less marginal' is definitely the best option.

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ACORN is the primary organization in the USA that is pushing Living Wage campaigns right now. It's worth taking a look around their website. In the About ACORN section you can see that they really do have that kind of broad social mission. The Living Wage campaigns are just one prong of their overall project, albeit the one they've probably had the most success with lately. Here's a link to their Living Wage resource page:

http://www.livingwagecampaign.org/

It's also worth noting that ACORN was based in New Orleans, so another big project they've had to undertake now is no less than rebuilding a devastated city.

ACORN has some problems a few years ago with how they treat their own staff, something unfortunately not uncommon in a lot of otherwise "progressive" organizations. I still admire for the work they do, though.

[ 16 January 2006: Message edited by: robbie_dee ]