July 5, 2001

Economic Scene: Battle Over Living Wage Heats Up

By JEFF MADRICK, The New York Times

In an era of increasingly free markets, it is a little surprising that the "living wage" movement has caught on in America.

Starting in Baltimore in 1995, it has spread to approximately 60 metropolitan areas, rich and poor, across the country. Living-wage agreements require any company doing business with a city, county or school board to pay all its workers on the project a high minimum wage, often as high as $10.50 an hour. This comes to about $21,000 a year for full-time work. The federal minimum wage is $5.15, or less than $11,000 a year.

But the living-wage movement, even as it spreads, will at most raise the pay of 75,000 or so workers. Only those companies with government contracts must comply, and they pay most of their workers more than the living wage already.

Partly because the impact is limited, economic objections to these programs have not truly taken hold. Conventional economic theory argues that any artificial increase in wages will tend to reduce jobs. Cities may also hire more qualified workers at the higher wage and dismiss the very low-wage workers whom the programs are designed to help in what is called the displacement effect. Because these programs are limited in scope, however, so are the purported adverse effects.

But the living-wage movement is now spreading beyond its original mission. Advocates for living wages are fighting battles for state and city minimum wages. They also participate in calculating so-called self-sufficiency wage standards of localities. Can these programs do more harm than good? If they go too far, of course they can. But given the low level of wages for so many in America, we are a long way from any such concerns.

In the face of general support for unfettered markets among economists and policy makers, the living wage movement seems to be potent because it is emanating from the grass roots. The original organizers of the living wage movement in Baltimore, for example, were church-sponsored poverty groups. The successful student sit- in at Harvard in the spring is likely to give further impetus to student movements around the country that were already under way.

And these groups are now spreading their wings. The Association of Community Organizations for Reform Now, or Acorn, a national organization of 150,000 low- and moderate-income workers, has been at the center of many living wage movements. Now Acorn is leading an intense political battle for a citywide minimum wage for all public and private workers in New Orleans. It would be the first city minimum wage in America, other than the longstanding one in Washington. Acorn was also involved in the adoption of a $6.75 statewide minimum wage in Massachusetts.

Such battles have also been joined by the self- sufficiency wage advocates. These groups, like the Women's Education and Industrial Union in Boston, are operating in 14 states. They calculate the cost of housing, food, health care, transportation to work and child care -- no recreation is included. They typically find that the self-sufficiency standards are 50 to 100 percent higher than the living wage.

As these movements become more influential, the opposition is bound to be more intense. Indeed, the basic lessons of economic theory cannot be dismissed. If wages move too high, they will reduce economic growth and hurt low-wage workers.

But knee-jerk assertions about such wage-raising programs are oversimplified. First, while there may be some job loss when wages are legislatively raised, the number of jobs will depend more on the state of the economy than on somewhat higher labor costs for business. The recent increase in the federal minimum wage, for example, has not made a blip in the unemployment rate because the economy has been strong. If the economy weakens, businesses are likely to let workers go because sales are down, not because wages are a dollar too high.

Second, the displacement effect is exaggerated. This criticism has received the most attention, including during the Harvard sit-in. If you are going to pay $10.50 an hour, why not hire a more qualified worker to replace the $8 worker? But it turns out that such higher-wage workers are not all that more qualified.

Robert Pollin, an economist at the University of Massachusetts, analyzed the educational backgrounds of the nation's cleaning and building services workers and retail cashiers. These workers represent a large share of the nation's low- wage employees. Mr. Pollin, who has been closely involved with living-wage movements around the country, found that there were only 15 percent more high school graduates in the higher-wage group than in the lower.

"There will probably be some displacement," says Mr. Pollin. "But it will be small and usually worth the gains for all the other workers."

Michael Reich and Peter Hall, economists at the University of California at Berkeley, provide corroborating evidence for this finding. They analyzed job displacement that resulted from the increase in the minimum wage in California from $4.25 an hour in 1996 to $5.75 in 1998. It was marginal.

Finally, raising wages may well improve the nation's productivity. A higher wage will reduce the high job turnover in these low-wage industries. Restaurants and hotels, which are major employers of low-income workers, lose 75 percent or more of their employees each year. Having to hire and retrain new workers is costly, so reduced turnover might well compensate for the higher wage.

American companies cannot pay any wage that community groups deem desirable. But the self-sufficiency advocates are not demanding that their high standards be met by the private sector. As Mary Lassen of the Women's Education and Industrial Union says, they want to help workers get the educational background required to qualify for better jobs. They also want more government support of child care.

The movement for decent wages in America has been a moral imperative for its advocates. But within reason, it can also be economically beneficial. It would be too bad if economists used their considerable persuasive power to undermine this movement.