White House Goes National With Living Wages

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ACORN, the controversial network of community groups that has lost much of its federal funding, may be fading away, but one of its most cherished campaigns, to get government to pay a so-called "living wage" to those who contract with the public sector, is about to go national thanks to the Obama White House.

News reports dating back to early last month on the Daily Caller website and more recently via the Associated Press describe a plan taking shape in the White House to rewrite federal contracting rules to give bidding advantages to those companies that pay higher wages and offer more health and pension benefits to workers in unskilled jobs - from janitors and landscaping crews to cafeteria workers at federal facilities. The idea is to prompt companies to pay a living wage, generally defined by labor activists as "sustainable wages" for a family of four based on an area's cost of living.

The new federal contracting procedures would be a major step forward in the national living wage campaign, which ACORN helped to found in 1995 in cooperation with unions (most especially the Service Employees International Union) and with university labor centers. ACORN operated the national living wage campaign resource center, which provided materials for local groups to pursue laws in cities and counties, providing a model for federal action.

Indeed, part of the White House's justification for the new contracting rules will be that the dozens of local laws now in effect prove that government efforts to dictate wages and benefits offer a net gain for the economy by raising incomes and reducing poverty. And to offset criticism that the laws also boost public sector costs at a time when government is under severe fiscal strain, proponents will argue that studies show higher wages produce better outcomes and more competition among firms for government work.

But most of the research that coalition advocates will cite is not based on nonpartisan, peer-reviewed economic studies, but instead are the work of local labor-backed groups. By contrast, work featured in established journals on living wage laws shows something quite different.

A series of studies by David Neumark of the University of California, Irvine, who is often considered the foremost authority on wage laws, estimates that while some living wage laws raise the income of certain low-wage workers, they also destroy jobs at the lowest income levels, thereby increasing unemployment. In particular, Neumark's work finds that laws which work via the government contracting process, as the Obama administration is planning to do, are particularly ineffective, generating virtually no boost to income levels even when the living wage is set at 50 percent higher than an area's minimum wage. By contrast, Neumark's research shows that living wage laws reduce unemployment by 6 percent among workers in the lowest income brackets, and that contracting laws specifically reduce unemployment by 3 percent, on average. At a time when the unemployment rate of unskilled adults aged 25-and-over is already a whopping 15 percent, this can hardly be good news and won't do much to propel more workers into the middle class.

Don't expect to find these results in media coverage of local living wage laws, however. In fact, when Neumark published one of his early studies on certain narrowly defined living wage laws, namely those that apply to companies receiving economic development subsidies, he observed that poverty rates fell in some places among low-wage workers even as unemployment rose, for the obvious reason that some workers were making more money. Advocacy groups seized on the first half of the statement and the media, whose reporters generally can't be bothered reading the actual research they are quoting, quickly responded with stories on the so-called glories of living wage that created a narrative about these laws that remains inaccurate to this day.

One reason the actual results of wage laws are so messy is because government can't control what businesses do once they are required to comply. In some cases, for instance, firms may continue government contracting but hire more skilled workers to do the work because there is no additional cost in doing so. In other cases, firms may opt out, decreasing the number of competitors and raising government costs, which could cut the amount of work that gets contracted out. In either case, it's low-wage workers who lose. That's why most nonpartisan economists favor other ways to help the working poor, like the Earned Income Tax Credit, which is a payment targeted through the tax system to the workers themselves.

But the problem with programs like the EITC is that they produce a very direct cost to government which can't be hidden. By contrast, supporters of the living wage often argue that it doesn't cost much for government or for the companies involved, sort of like those all-you-can-eat-and-still-lose-weight diets. For instance, when the city of Los Angeles was considering a living wage law for contractors back in 2002, advocates argued that companies could absorb most of the additional costs without charging the government more for their services because collectively the companies in question had $4 billion in annual revenues and the wage law would "only" cost $40 million in higher salaries.

But as an independent economist hired by the city, Richard Sander of UCLA, observed, the real impact of the $40 million cost was on profits, which are only a small fraction of $4 billion in revenues, especially among the companies that typically do business with government, like construction contractors, who have only a 3 percent net profit margin on average, or services companies who boast a mere 2 profit percent margin. Not surprisingly, after L.A. passed its living wage law, contractors raised their bids and the city bore the full cost of higher prices, a study by Sander later concluded.

But to dwell too much on the economic research of the living wage also misses the point of these campaigns, which is that they are vehicles that unions and their allies use to advance an agenda that often has nothing to do with the cause of low-wage workers. Some living wage laws, for instance, specifically exempt unionized companies from their requirements even when those companies don't pay the required wages, a blatant ploy to pressure firms to encourage workers to organize. And by raising the cost of doing business with government, living wage laws provide a deterrent for politicians to outsource or privatize public-sector jobs. ACORN was blunt about this strategy when it declared in its living wage manual that, "The Living Wage undercuts the incentive to privatize," which is one reason why public sector unions have gotten behind living wage campaigns.

The actual impact of a federal living wage policy will depend on the details of the program, which in turn, I suspect, will be based on whether the administration thinks it can introduce new requirements by executive order, or whether it needs to go to Congress and have a knock-down, drag out fight. Could the White House propose new rules that are as patently pro-union as some local legislation? Well, this is the same administration that a few weeks ago tried to exempt unionized workers from a tax on "Cadillac" health plans. I'm not sure anything I've seen in local living wage campaigns is as transparently a sop to unions as the Cadillac tax exemption.

In other words, anything is possible.



Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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