Notes from the March 27^th SCIPUP Meeting

Issues with Wage Floors (i.e. a minimum wage)

• Economists as a whole do not usually favor a living wage
• They object to changing the relative prices/wages that people receive, and also worry about effects on efficiency

Minimum Wage Laws

• In a perfectly functioning economy, raising the wage rate leads to fewer workers being hired
• Firms tend to substitute away from workers, as they are relatively more expensive, and instead invest in machinery, etc
• Firms may also cut production because the costs have gone up

The controversy:

• How large are the employment affects?
• Some studies show that the employment effects are very low

Living Wages

• Much higher than the minimum wage: higher wage floor translates to larger effects
• Very narrowly targeted (the minimum wage applies to almost everybody), so the living wage has fewer economy wide effects
• Having a narrow focus also means that it helps very few people
• Serious problems could follow a large expansion
• There rest of the economy (the uncovered sector) provides some safety valve for workers who may be displaced by the living wage, however, as you add more people to the labor pool in the uncovered sector, you tend to depress the wages there: as you increase the labor supply, the equilibrium wage falls

How sizable are the effects?

• Benefits are fairly concrete
• A fall in employment arising from a living wage tends to be fairly invisible. The economy is growing as a result of other factors, so sometimes job loss isn’t evident, even though it is existent (there are still real effects)
• There is an idea that prices are being distorted: some tasks are not worth a living wage, where the function doesn’t produce enough output for the price

· In the New Haven case, if the living wage really only affects 30 workers now, then there are probably not any noticeable negative effects; however, there are probably not any noticeable positive effects either

We should ask who is benefiting-

• Sometimes, living wages are pushed for by unionized city workers trying to prevent the city from contracting out (to protect city workers jobs)
• It is possible that a living wage may drive certain contractors out of the bidding process. This has the potential to raise costs for the city

Santa Monica has a clause that says companies can become exempt if they can’t afford to pay the wage-

• This is a dangerous provision, because it is hard to enforce

Other effects-

• Increased consumption from the people now making more money, but also decreased consumption in terms of the newly unemployed people
• Tradeoff- it is possible that the total gains will offset the total losses, but it is again hard to say
• Some say that those who keep their jobs are those that are more attached to the work force- for instance teenagers would lose their jobs- but there isn’t a lot of evidence

One paper shows that on average, in years following the enactment of living wages, there was some small decrease in urban poverty levels

· This could be because most of the working poor do not receive government assistance while they are working, even if they are close to the poverty level. Government assistance kicks in and acts as a safety net for the workers who lose their jobs because of the increase in the wage rate. Thus there is some favorable asymmetry: the living wage increases income for some, while the effects of the loss in jobs may be protected against somewhat by government assistance

· This reduction in poverty was found in cities that had a broader living wage- there would likely be very little affect from a narrow wage

Where do you begin to broaden the living wage?

• Typically, it is a state function to raise wages. The city has very little authority to raise wages. The living wage can only be extended to organizations over which the city has some leverage (i.e. contracts, etc).

Will the living wage cause other firms to raise their wages also to compete?

• This is unlikely given the present state of the economy. Because unemployment is increasing, firms don’t need to compete for workers, and thus there is less pressure to raise wages.

Could a living wage cause jobs to move to the suburbs, out of New Haven?

• This raises many questions. There is a lot of movement between the suburbs and the city, with people commuting both directions. Should the living wage target city workers, or city residents?
• Job loss to the suburbs has the worst effects for the urban poor as they are the least mobile group.
• A living wage could cause firms to decide to sell their services to other counties. Given New Haven’s larger size in relation to surrounding counties, it is unlikely that this will happen. However, New Haven is still a small city, and thus not completely dominant, so there is some possibility.

The Health Insurance Provision-

• This is problematic because it impacts small firms much more than large firms. Small firms cannot pool risk, and thus have much higher health care costs.
• The “either/or policy” is possibly better, but still places a greater burden on small firms
• Health care was amended out of the New Haven plan in 1997

The city isn’t really a profit maximizing firm-

• The city acts as an agent for all tax payers; it may be okay if a living wage is not good for its profits.
• The city may not be sensitive to prices. This means that the city still needs to pave the streets even if the cost of labor increases. This might mitigate the negative employment effects.

• The living wage can be thought of as a type of transfer, but it is very specific in nature and possibly has more disadvantages than a lump-sum transfer (Inefficient transfer of resources)
• The issue is the distortion of prices
• For example, now some bus drivers earn significantly more than others.
• Services aren’t different than goods, there is a fair market value