Tuesday, July 19, 2005

Unintended consequences

So-called living wage laws have been around for a decade, giving researchers at least a beginning set of data to study their effects. And it turns out that the effects are exactly what common sense and a basic understanding of economics would lead one to expect.

A new study shows that the laws do, as hoped, correlate with a drop in poverty rates of close to 2 percent over the first year, with most of the gains coming from low-income families. So far, so good.

There is, of course, a price for this decrease in poverty, and that is an increase in unemployment among the same group. The study found that a 50% increase in minimum wages for the least skilled workers resulted in a 6% decrease in employment among those same unskilled workers in a given area over the first year.

Both the wage increase and employment decrease effects grow larger where the living wage ordinances are broader in scope.

I know what you’re thinking; this falls under the heading of “duh!” It would be shocking if companies who are forced to artificially raise wages to comply with regulations did not pay for it by decreasing hiring (and probably also benefits). But it is nice to have some concrete data to put to the issue.

In essence, it turns out that living wages are merely yet another government transfer program, in this case a transfer of money to one group of the poor at the expense of another group of the poor (as always, with the government confiscating some of the take for administration). Whether you support living wage comes down to whether you believe that the goal of elevating ~2% out of poverty is worth sinking ~6% deeper into poverty. That’s a debatable issue, but to pretend that you can do one without the other requires either disingenuousness or ignorance, neither of which is ever in short supply on either side of this kind of debate.


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