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The Illusion of Living Wage Laws

October 15, 2009

Tags InterventionismMonetary TheoryOther Schools of ThoughtPrices

Athens, Georgia, is widely considered to be impoverished. A "living wage" is usually the result of a local government effort to increase the legally permissible wage above the state or federally mandated minimum wage in that area.

Many residents of Athens have been trying to implement a living wage in the community for some time. These efforts are largely supported by the faculty, staff, and students at the University of Georgia, in Athens. Focusing on some of the least-skilled workers, I show why the living wage would not have any positive impact on the poor in Athens and why a higher mandated wage could further impoverish them.

There are plenty of people who can tell you the "benefits" of a living wage. Of course, these benefits are very shallow and short-term. A deeper economic and social analysis demonstrates the appalling costs of such regulation.

As with all government regulations, the most significant problem with living-wage legislation would be the unforeseen consequences, in this case unemployment. Many would say that unemployment levels do not increase very much when living-wage laws are enacted, but looking at general employment numbers does little for determining the effects on the poor.

Take, for instance, current unemployment statistics in Georgia. Unemployment in the state has hovered between 3.4 and 6.5 percent over the past decade.[1] These rates are deemed acceptable by our government and it is unlikely that they are much affected by the minimum wage. Additionally, based on other states' experiences, one would not anticipate a large change in the unemployment rate due to living-wage legislation.

However, I contend that the small magnitude of changes in the general unemployment rate does not justify a living wage because it does not represent its impact on the poor. Poor people make up a small fraction of the people counted by employment measures.

The overwhelming majority of Americans in the workforce are not directly affected by living-wage laws. Their jobs are safe because they are worth significantly more to their employers than any (current) mandated wages. If we want to discuss the effects of the living wage among the poor, we must consider only the poor in our statistics.

Let us consider some of the less-employable American workers: teenagers. Teenagers are generally worth lower wages than any other age group in society, due to their immaturity and lack of experience. Indeed, it stands to reason that people are worth the least in the first job they ever take. Typically, the best teenage workers' wages will increase during the first few years. Most, however, will not see any significant wage increases until they finish school or move into full-time work.

The unemployment rate is measured as a percentage: people who want work but cannot find it are divided into the total number of people who want work, including those who are actively in the workforce. According to US Department of Labor statistics, American teenagers experienced an unemployment rate of 15.7 percent in 2007. (Note that this low figure was during the Fed-fueled boom).[2] This is one group of people who truly are affected by living-wage legislation. A change in the generally reported unemployment rates does not reflect the changes many poor (or less-skilled/inexperienced) people feel.

This number would be very susceptible to a change in mandated minimum wages because so many teenagers are already worth barely more than the current minimum wage in terms of productivity per hour. Whether it is poor teenagers or other unskilled groups, higher wage laws are only going to decrease their opportunities to find work and improve job skills.

Clearly, some people are going to be adversely affected by a living wage. One could argue from a standpoint of liberty (formerly an American ideal), that laws adversely affecting some groups should not be enacted, but we will only look at the economic impacts of such legislation here.

The data show that the people most likely to be affected by living-wage legislation are black, teenage males. This group had a national unemployment rate of 33.8 percent in 2007. When the data are broken down for black males aged 16 and 17, the unemployment rate is in excess of 40 percent.

These numbers are staggering, and they would only get worse with a living wage. Some teenagers would not even have the option of work because the value of their marginal revenue would not equal their new, higher wage cost.

So, what happens to these people who are left jobless? Well, they still need money and something to do during the day.

Not surprisingly, crime rates are highest among those in their late teens and early twenties. The Georgia Bureau of Investigation cites young people, aged 17–21, as perpetrating 23.4 percent of the crimes in the state.[3]

It is no coincidence that those who cannot find work tend to find things that get them into trouble to fill their time. I argue that enactment of a living wage would only put more young people on the streets rather than in jobs where they can learn skills that will serve them well in the future.

Not only is this lack of work bad for young people and other low-skilled workers, but it also hurts the local economy. Due to the higher mandated wage, jobs that are not worth this wage will no longer be performed legally in the community. Trash pickup, general cleaning, inexpensive food preparation, farming, and many other tasks would be either neglected or moved to places with lower wage costs.

This general lack of production would not be due to people's lack of desire to do the work, but to government's intervention, which would keep the tasks from being done on the grounds that their monetary value doesn't fit with the social agenda. It may seem desirable to keep people from working for too little money, but keeping people who want those jobs out of work is both an attack on liberty and a mistake in economics.

If we compare life in a city to life on a deserted island, then we can better understand the repercussions of not allowing our least-skilled laborers to work for what they are worth. Take, for example, ten people shipwrecked on an island, with no expectation of a rescue anytime soon.

Let us say that one is too old to work, three are children, and the other six are capable adults. We assume that the six adults and the three children will work to build and maintain shelters, find and deliver clean water, and locate and cook food for all ten people.

Now suppose that three of the adults start businesses in which each takes care of one of the main tasks on the island. They each hire one other adult and one child to help accomplish their daily tasks. The children are probably not excited about the amount of resources allotted to them as pay, but they know that it is the best offer they have (better than surviving alone) and so they choose to continue working for meager portions.

Now, what would happen if we implemented a living wage on the island? Let's say the group votes that two of the children are not getting enough food and benefits from the work they do.

Now, the two youngest and least-skilled kids are no longer allowed to work because they are not getting paid enough. By choosing to participate in the working program on the island, the kids themselves were saying that they were better off working with the group than being by themselves, and that they can benefit from group trade. However the group decided the deal is not good enough, so they prevented the kids from working.

"By choosing to participate in the working program on the island, the kids themselves were saying that they were better off working."

It seems asinine not to let people work when they are trying to survive on a deserted island, just because they do not produce as much as others. Yet, when it comes to a city, many people quickly assume that others should not work for less than some guaranteed wage.

I propose that the standard of living is higher for the people of a city (or deserted island) who let as many persons work as want to, than in a community that eliminates jobs that do not seem particularly enticing. The absence of a living wage does not require the undue work of any one person; it just protects the rights of those least-skilled people who want to work, while providing services that increase everyone's standard of living, including the workers' own.

Now let us look at the island two years later. There are two possibilities. One is that two children have not worked for the past two years because they were not considered productive enough. They ran around the island, playing games and living off the labor of the seven workers. They have not gained any job skills or experience to make them more valuable citizens on the island.

The other possibility is that the children were allowed to work for the previous two years. Not only have they matured, but they have also developed much-needed job skills in their given tasks. Perhaps, by working, they have created more efficient methods for delivering their goods and services. Perhaps they have learned how to do their respective bosses' jobs and are ready to take over should something happen to that person. At the very least, they have contributed two years of production that has increased the standard of living for everyone on the island.

I use the island illustration to show that even basic economics demonstrates problems with mandated wages. Another argument, presented by Lew Rockwell, deals with the optimal level of wages. If eight dollars an hour is good, then why would we not require twenty or even one hundred dollars an hour as a living wage? These numbers sound absurd, but the economics that makes them unthinkable is the same economics that makes even a "low" living wage an inefficient option.[4]

$25 $22

 

Standards of living do not increase with wages, but rather with production. Society needs people to produce at any wage, and then prices will reflect the wages being earned for a given task. Once we look at the living-wage law from the point of view of someone who loses his or her job (as opposed to someone who gets a raise), we see its ugly side.

Ultimately, a living wage in Athens (or anywhere) will actually hurt the poor rather than helping them. It will decrease production, increase counterproductive activity for the least skilled, and increase prices for the entire population. Cities like Athens should encourage work instead, by minimizing regulations on labor and allowing everyone's standard of living to increase with unadulterated production.

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Notes

[1] Economagic, "Economic Time Series Page," October 29, 2008.

[2] U.S. Department of Labor, "Employment Status of the Civilian Noninstitutional Population by Age, Sex, and Race," October 29, 2008.

[3] Georgia Bureau of Investigation, "Crime Statistics," November 6, 2008.

[4] Rockwell, Llewellyn H. Jr., "The Bridge of Asses," Ludwig Von Mises Institute, October 2, 2003.

 


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