Policy Analysis No. 493

Keeping the Poor Poor: The Dark Side of the Living Wage

By Carl Horowitz
October 21, 2003

Executive Summary

For nearly a decade, activists on the left have been conducting a highly effective nationwide campaign to mandate local minimum wages at levels that presumably eliminate poverty for full-time workers and their families. This “living wage,” as it is known, is now the law in dozens of jurisdictions, and dozens more are actively considering similar measures. Typically, a living wage is set anywhere from 50 percent to 100 percent above the current federal minimum wage of $5.15 an hour and often higher if employers do not provide health benefits. Thus far, there has been only modest resistance, even from local governments for which the cost of doing business inevitably rises.

Most living wage ordinances apply to private-sector government contractors and, to a lesser extent, recipients of business aid or local government employees, or both. Supporters insist that the benefits are enormous and the costs minimal. But that view is an illusion, a product of the insular world of local government contracting. If the living wage were applied to all employees across the United States—the goal of advocates of a living wage—it would greatly magnify the well-documented pitfalls of the minimum wage.

Decades of research have shown that the minimum wage harms the least-skilled workers from poor families while heavily benefiting young workers from middle-income households. Several studies critical of the living wage come to similar conclusions. The main beneficiaries of the living wage are public-sector unionized employees because of the reduced incentives for local governments to contract out work. Instead of exploiting grievances of the marginally employed against “greedy” employers, advocates for the poor should focus their energies on building the skills of the poor.

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Carl F. Horowitz is a Washington, D.C.,-area consultant on labor, welfare reform, immigration, housing, and other domestic policy issues. He was previously a housing and urban affairs policy analyst at the Heritage Foundation and a Washington correspondent for Investor’s Business Daily.