Living Wage Proposals: Imposing Price Controls on Labor. by Carl Gipson Director, Center for Small Business and Entrepreneurship

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1 Legislative Memo Living Wage Proposals: Imposing Price Controls on Labor by Carl Gipson Director, Center for Small Business and Entrepreneurship March 2007 Fulfilling the American Dream is most often defined as working hard, paying taxes, buying a home, obeying the law, starting a family, etc. For the most part, gainful employment is one of the cornerstones to achieving the American Dream. Employment brings paychecks, which provide housing, food, clothing, and more. Our social and economic system is designed to provide everyone with a fair shot at success but no one is guaranteed that success. In reality, whether through fault of their own or not, not every worker earns the big paychecks to provide fancy cars and large homes. Many people get by on a paycheck-to-paycheck basis, saving little for the future and worrying about how to pay their bills. Two proposals before the state legislature this year are aimed at fixing those worries. Unfortunately, they are misguided and will actually serve to harm more than they could ever help. The idea behind a living wage is nothing new. Many states and cities have debated this issue for decades. Similar to the minimum wage, a living wage is a wage that would guarantee a certain baseline level of purchasing power for an employee. The notion is that whoever earns a living wage will not go hungry, will provide for a family and will remain an active consumer in our economy without having to rely on government welfare. Pay for Perceived Need, Not for Actual Work What many of the backers of the living wage ignore, however, are several fundamental economic truths, basing their assumptions instead on narrowly focused arguments. First and foremost is the misguided notion that employees are to be paid based on their supposed state of need, instead of their actual work production. Both proposals highlight the "need" for "adequate" wages for all employees. But how can the government determine adequate wages using this system when one worker could be the chief earner for a household while another employee performing the same job is single? One proposal before the legislature would mandate that private companies contracting with the state must provide living wages to their employees, as well as any

2 subcontractors. Employees with health insurance would receive at least $9.25 per hour and those without health insurance would receive at least $11.00 per hour. It always makes for good public relations to instruct companies to pay their workers a "fair" wage, but to do so truly throws out normal economic realities. For most businesses, the largest expense is the cost of labor. When labor costs increase, a business has only a few options. First, it can simply absorb the cost (often limited to businesses with large cash reserves). Second, it can take active steps to decrease the cost of labor often through layoffs, increasing workloads for employees or implementing automation. Third and most common, it can increase the cost to the consumer to cover the difference. Living Wage is a Price Control When a government actively takes steps to arbitrarily set a higher wage rate then the market dictates, it faces the unintended consequence of passing the cost onto taxpayers. When a government agency contracts out to private employers, the government pays the employer using taxpayer dollars. When an employer bids for a project, he or she takes into account the cost of labor for the project and bids accordingly. The increased cost of labor is folded into a bid for a state contract that is then passed on to the state government (which is funded by taxpayers). Because government is not a business and is not in business to make a profit, it often does not act as a private-sector business normally would. If a private business' operation is out off-kilter, chances are it will not survive in the free market. Government faces no such threat; therefore, taxpayers should be very concerned that policies such as living wage would increase the government's need for a broad tax base (i.e. bigger government needing more tax revenue). Taxpayers should also be concerned because the $9.25 ($11) rate would only exist for one year. The Department of Labor and Industries will revisit the wage level each year and each year the wage will be increased to negate the effects of inflation. Labor Costs Influence Inflation An important point to stress is just how much the cost of labor plays into determining the consumer price index (CPI), which is largely how inflation is calculated. The CPI increases reflexively to the cost of certain goods. The prices of these goods are largely affected by the price of production, which includes labor costs. Essentially it's a neverending inflationary spiral labor costs increase thereby increasing inflation and the government responds by raising the cost of labor, which raises the cost of inflation and so on. Lawmakers should take into account the prevailing wage laws prior to considering a living wage proposal. The prevailing wage policy tends to act as a similar wage-adjuster for employers contracting with the state government. Prevailing wage laws mandate

3 paying state employees and contracted employees a wage to protect them "from substandard earnings and to preserve local wage standards." Any contractor must pay its employees a wage rate determined by the Department of Labor and Industries for all intents and purposes another form of price-controlled labor costs preventing any wage competition. While most state employees in the construction and maintenance industries fall under the prevailing wage provision, it is unclear just how many employees would benefit from a living wage provision because the current proposal only extends to contracts under the departments of Ecology and Community, Trade and Economic Development. The other proposal introduced into the legislature this session would tack on yet another wage-adjuster scale to the current minimum wage system. This would result in an additional percentage increase (most likely around 4%) to the yearly minimum wage adjustment again raising the cost of labor to businesses. This proposal is aimed at the general working populous, unlike the other proposal that only targets state contracts. Socio-Economic Gerrymandering Policymakers should avoid pulling up the lower-socio-economic class by artificially raising wages. Numerous studies have shown that minimum wage increases will not raise people to a better social and economic strata and the same is to be said for a hyperminimum or living wage. As companies incur higher labor costs, they will find ways around bearing those costs in the form of higher priced goods and services, or trimming the workforce. The unintended consequence turns out to harm the folks the law was designed to aid. A study by the Employment Policies Institute in 2005 on Santa Fe's living wage ordinance found that the ordinance was responsible for a 3.2 percentage point increase in the city's unemployment rate. It also found that workers with fewer than 12 years of schooling were disproportionately negatively affected because they were the most likely to have their hours cut or be laid off altogether. Santa Fe's living wage ordinance was levied on businesses with more than 25 employees. The bottom line remains that employers will have little motivation to hire low-skilled workers those whose inexperience and lack of productivity does not warrant a wage meeting or exceeding the proposed living wage amount. These workers, who most desperately need experience, will be the ones left most vulnerable. Instead of being able to establish a foothold in the job market, they will have to rely on other means to provide for themselves most often state-assisted. A look north to the city of Bellingham may give insight on what to expect from a living wage proposal for state contracts. Bellingham's living wage policy is rendered largely moot because of the pre-existing prevailing wage law. Therefore, many of the state contract workers would not fall under the purview of a living wage law they already benefit from existing prevailing wage laws.

4 However, implementing a living wage law for public sector contracts could embolden living wage supporters to push for similar regulations in the private sector. Already, the city of Spokane is facing a living wage debate on an ordinance that would mandate living wages for employees of large retail stores within city limits. Imposing living wage ordinances on private sector industries, whether targeted at specific industries like retailers or within specific city limits, would have a drastic and immediate economic impact and irreparably harm Washington s business climate. The munificent idea behind the living wage is as commendable as it is misguided. Policymakers should be weary of proposals that are predicated on the notion that a "living wage" will quickly and efficiently pull certain segments of society into prosperity and security. Wishing this simply does not make it true. Washington Policy Center plans on publishing a full-length Policy Brief on the living wage issue and the proposal before the voters of the city of Spokane. The Policy Brief is scheduled to be published during the late spring/early summer of About the Author Carl Gipson is a policy analyst and Director of the Center for Small Business & Entrepreneurship. He was formerly Director of Communications and Operations for WPC and regularly writes opinion pieces, legislative memos, policy notes and is the author of Reviving Washington s Small Business Climate. Carl holds a degree in political science from Western Washington University. Published by Washington Policy Center Chairman President Vice President for Research Communications Coordinator Greg Porter Daniel Mead Smith Paul Guppy Lyndsey Hartje If you have any comments or questions about this study, please contact us at: Washington Policy Center PO Box 3643 Seattle, WA

5 Visit our website at Or call toll free: Washington Policy Center, 2007 Nothing in this document should be construed as any attempt to aid or hinder the passage of any legislation before any legislative body. Contact Washington Policy Center at or online at washingtonpolicy.org.