This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
3/30/2005
Living Wage Laws
Battles over minimum and living wage laws are all over the political radar. The article, Durham paves way for living wage in NC, is just one more example of municipal governments electing to institute living wage laws. "When you are trying to help people reach the 'American Dream,' a living wage is the best way to do it," said James Mitchell, a member of Charlotte's City Council. Arguments like This one from Councilman Mitchell are the battle cry for living wage activists. Where is the economic sense? When government requires employers to pay more in wages unemployment grows and the price of goods increases, thus making us all poorer. As managers living wage laws will make us less efficient and will be a roadblock to progress.
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I bet you can imagine what I'm going to say, but I'll say it anyway - living wages are one of the worst policy ideas around.
Living wages are a version of a price floor. Price floors involve hurting one group of people to make another group better off, and there is a deadweight loss that hurts everyone in the process. No one in favor of living wages ever talks about who it's going to hurt. I think that's immoral.
Here is a different take on this. There is a literature in macroeconomics called efficiency wages. The idea is than a manager might pay a worker more than they are worth in exchange for showing less tolerance when the employee might need to be fired. The result ends up being a higher wage, more unemployment, a bigger divide between the employed and the unemployed, and a lower tolerance for shirking on the part of management.
The only difference between living wages and efficiency wages is that the former are imposed by government and the latter are intentionally pursued by managers. This implies that living wage advocates are in favor of more unemployment, less tolerance, and bigger divisions in society. Huh? Yes, you read that correctly. They just don't tell you that part. It doesn't make them sound very nice does it?
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