By Niels Veldhuis
Terrace city council recently shelved a proposal to implement a living wage policy. Terrace taxpayers should hope it stays shelved.
A living wage is a minimum hourly wage that is supposed to be pegged to the level at which a household can “meet its basic needs.” All city employees and the employees of businesses that contract with the city to provide services must be paid at least this living wage.
Terrace city councilors were asked to set the city’s living wage at $17.65 an hour and to ensure contractors and subcontractors were also paid that much. But, according to research done by Chris Sarlo, a professor of economics at Nipissing University, this level of income is significantly above that which is required to meet such needs as a nutritious diet, satisfactory housing, clothing, health care, public transportation, household insurance, telephone service, and a host of other items.
Advocates of living wages argue that these artificially imposed wage levels are one of the most powerful tools available to reduce poverty in BC. Evidence from the United States proves differently.
For starters, the imposition of living wages reduces job opportunities for the very families they are intended to help. When wages are legislated by government above those that would result in a competitive market, employers respond by reducing the number of workers they employ and/or the number of hours their employees work. That means living wage laws lead to higher unemployment for low-skilled workers and reduce opportunities for those entering the workforce to gain valuable skills and work experience.
These effects have been well documented in the US where about 140 municipalities have implemented living wages over the past two decades. Professor David Neumark of the University of California Irvine and Dr. William Wascher of the U.S. Federal Reserve, recently reviewed the real world evidence of the impact of living wage laws in the US. They concluded that living wage laws result in reductions in employment. Specifically, a 10 per cent increase in the living wage reduces job opportunities by nearly 2 per cent.
These finding are further corroborated by evidence on the impact of living wage laws on hiring decisions. A recent study in the Southern Economic Journal examined the impact of the Los Angeles Living Wage policy on firms’ hiring practices. The authors found that workers hired after the living wage policy came into effect had more prior formal training that those who were hired before the policy. This suggests that living wage policies are particularly harmful to low-skilled workers since employers hire more qualified workers to compensate for the wage increases.
Employers respond to legislated wage increases by reducing fringe benefits and on-the-job training. Workers lucky enough to retain their jobs after a living wage is instituted therefore may not be better off due to reduced benefits and/or training.
Terrace councillors were also asked to have the living wage apply to contractors and subcontractors. But since higher labour costs faced by contractors are in part passed on to cities, living wages can also have a significant impact on municipal budgets and thus property taxes, property values, and local development. Increased property taxes lead to increased rents which especially hurt low-income families.
When the wages of employees of private contractors are forced up to the wages received by unionized municipal workers, there is a reduced incentive for the city to use private sector services. Therefore, more activities will be done by the city rather than outsourced to the private sector.
This is unfortunate given the benefits of outsourcing. A comprehensive academic survey of studies on contracting out found that competitive tendering and contracting usually lead to cost savings, of about 20 per cent and that private sector services are superior to their public counterparts.
Living wages are not the answer to the hardships experienced by many poor families. Rather than reduce poverty, living wage laws rob low-skilled workers of the opportunity to participate in the labour market. As a result, living wage laws hurt the very people they are intended to help, especially when the economy slows and more of them are trying to find employment.
Niels Veldhuis is an economist and president of the Fraser Institute.