The subject of “living wages” or higher minimum wages has sparked vigorous debate in every city or state where the issue has been put on the ballot. The subject invokes partisan politics with the left declaring “big business” only wants profit, and the right stating the market should determine wages. The truth economically tells a different story.

Cities and States Enacting Minimum Wage Laws

Over 100 cities have enacted living wage laws, but several high profile cities include; Los Angeles in 1999, San Francisco in 2000, and Santa Fe in 2003. Nevada voters also enacted legislation that, although not technically a living wage regulation, raised the minimum wage in the state to $6.33 per hour for businesses that do not offer health insurance. Nevada follows federal minimum wages standards for businesses that do offer health insurance.

Basic Regulations

The basic premise of living wage laws is to compensate lower skilled employees and allow them more economic opportunity. Most of the regulations exempt small businesses and specifically target larger companies. Another interesting point to note is which cities have enacted legislation and who the lobbyists behind the scenes are. In almost all cases, workers advocates (leftists) in left leaning cities have gotten these laws passed with major funding and help from the labor unions.
The original living wage legislation in San Francisco originally looked like that in most cities; the legislation only affected city contractors. San Francisco has amended the law and now requires all employers to pay workers a minimum of $9.36/hour with very few exceptions (City of San Francisco, 2008). This shows the danger of creeping incrementalism so prevalent in politics today. Santa Fe’s legislation also targets all businesses in both the profit and nonprofit sectors as well as contractors working for the city (City of Santa Fe, 2008). The legislation passed in Los Angeles requires any company doing business with the county to pay either $11.64/hour, when at least $2/hour worth of health benefits are not included in the salary, or $9.64 when health benefits worth at least $2/hour are included in the salary. Los Angeles also requires that all employees work 35 or more hours unless the contractor can show the necessity of hiring part-time workers (Los Angeles County, n.d.).

Economic Impact

The usual gang of Socialists, Communists, and far left politicians like to claim that living wage laws are good for everyone in the affected area. In the pro-living wage camp the usual arguments for a living wage ordinance include reduction of urban poverty and improved economic outlook for workers. The living wage movement generally espouses the right of any full-time worker to not live below the poverty line (Bernstein, 1999). Mainstream economic theory though disagrees with the idealists, radical economists, and those who prefer to destroy capitalism.

Taxpayers Lose

If a living wage is bad then who loses when legislation that artificially inflates wages is passed? Certainly taxpayers lose. If a city passes a living wage ordinance then the increased cost is necessarily passed on to the taxpayers. Business must pass costs on to the customer and ultimately that is the taxpayer. If a city needs a contracted service or product the supplier must comply with the living wage in that jurisdiction, and that may mean the company has to raise wages.
At the very least living wage laws lessen competition. For example, suppose a city needs to buy some furniture and three companies bid on the contract in prior years. All the companies were paying above the federal minimum wage, but less than the new living wage. This means that all the companies must raise their wages and subsequently their bids. Suppose also that one of the companies is outside the living wage jurisdiction, that company’s business model may not allow the company to increase the minimum wage they pay. They no longer bid on the city contract effectively cutting competition and forcing the city to pay more. Another possibility is that one of the companies goes out of business because consumers and other buyers can simply buy the furniture at a lower cost from the company outside of the living wage war zone. Sounds amazingly like the current offshore outsourcing debate.

Workers Lose

Workers also lose. The bottom level employees are not the only ones that are affected; wages for all types of employees will also rise as do the benefits and hidden taxes paid for by the employer. As minimum wages rise the number of jobs for inexperienced workers such as teenagers, college students, interns, and part-time workers declines, although conflicting data has been reported with regard to job losses (Nuemark, 2002, p. viii). As wages for all employees rise, the cost of goods also rises, thus negating any gains made by the living wage.

Consumers Lose

Consumers also lose when the government regulates pay. According to a study at the University of California, Berkeley (Novack, 2006), although pay at restaurants increased and although no jobs were lost, prices did go up, as most economic models predicted. Novack (2006) also reports that although no jobs were lost in San Francisco, other cities trying artificially to raise wages risk “a lot of unemployment.”
Supply can also be threatened with artificial minimum wage levels. Many businesses that are located in areas with living wage laws can move out of that jurisdiction to a more wage friendly location. Certainly some businesses can not move, restaurants and city contractors come to mind, but many businesses will move. As mentioned above, the same effect can be seen internationally as well. As labor costs go up, businesses start to think about moving to a lower cost locale.

Unions Win

Who wins from living wage increases? There truly is only one winner and that is unions. Unions are behind many of the ballot initiatives for living wages and increases in the federal minimum wage. It would seem counter-intuitive that unions would want to further increase non-union members pay, but the unions have found that by requiring employers to either pay living wages or unionize, the unions basically get a city ordinance mandating collective-bargaining (Malanga, 2003). An example of union’s collusion is the 2007 extension to the living wage laws in Los Angeles. This extension forced the hotels at Los Angeles International Airport to comply with the cities living-wage law; of course, hotels which are unionized are exempt. Malanga (2003) also points out that municipal unions also like the living wage because it raises the cost of privatization, thus ensuring the status quo of highly paid city workers.

Conclusion

Although I certainly have a free-market bias, very little compelling evidence exists to support the notion of living wages. As minimum wage goes up, so do the rest of the company’s salaries. Multiple reasons exist as to why those jobs pay so little; over supply of labor and lack of skills are but two of the reasons.
Of course, those who believe in Marxist economics like radical economist Bruce Pollin, will also believe that redistribution of wealth will effectively eliminate the rise in middle and upper class salaries that occurs with a rise in the minimum wage. Pollin and other radicals have consistently been wrong when discussing the tangible cost of government intervention in the market. One report Pollin made to Los Angeles rosily predicted that doubling the minimum wage for Los Angeles contractors would only cost the city $7.5 million dollars and contractors a mere $40 million in payroll costs (Malanga, 2003). In reality it cost the city, not the contractors. Contractors merely passed the costs onto the city or provided fewer services, and the city now had the extra burden of having to monitor compliance with the ordinance adding upward of 100% to the total contract price.
In Cuba, a Marxist country, almost all workers are paid the same, a doctor makes around $20 a month and a seamstress makes about $16 a month . Due to the redistribution of wealth, everyone lives in equal poverty. In other words, not much of an incentive to work exists where wages are controlled 100% by the government who effectively taxes at 99%. But even Cuba has a free market, the black market, and the highest paid “professions” are prostitution and selling of stolen government goods.

References

Bernstein, J. (1999). The living wage movement: Pointing the way toward the high road. Retrieved July 2, 2008, from http://www.epi.org/content.cfm/webfeatures_viewpoints_lw_movement

City of San Francisco (2008). Minimum wage ordinance. Retrieved July 2, 2008, from http://www.sfgov.org/site/olse_index.asp?id=27605

City of Santa Fe (2008). Living wage. Retrieved July 2, 2008, from http://www.santafenm.gov/index.asp?NID=84

Los Angeles County (n.d.). Living wage program. Retrieved July 2, 2008, from http://lacounty.info/doing_business/living_wage.htm

Malanga, S. (2003, January 30, 2003). ‘Living wage’ is socialism. New York Sun, 2003, January, . Retrieved July 2, 2008, from http://daily.nysun.com/Repository/getFiles.asp?Style=OliveXLib:ArticleToMail&Type=text/html&Path=NYS/2003/01/30&ID=Ar00700

Malanga, S. (2003, Winter). How the “living wage” sneaks socialism into cities. City Journal, 2003, Winter, . Retrieved July 2, 2008, from http://www.city-journal.org/html/13_1_how_the_living_wage.html

Novack, J. (2006, November 1, 2006). The minimum wage: It’s all local. Retrieved July 2, 2008, from http://www.forbes.com/businessinthebeltway/2006/11/01/minimum-wage-debate-biz-wash-cz_jn_1101beltway.html

Nuemark, D. (2002). How living wage laws affect low-wage workers and low-income families. Retrieved July 2, 2008, from http://www.ppic.org/content/pubs/report/R_302DNR.pdf

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For many years politicians have been complaining about the perceived over-paying of management in public companies. Everyone has heard about the huge golden handshakes given departing executives upon leaving companies they have destroyed. John McCain has stated “all aspects of a CEO’s pay, including any severance arrangements must be approved by shareholders” (Mason, 2008). An article in The Economist (2008) argues though that although managers pay has gone up faster than workers pay, managers pay is by and large based on financial returns.
The Economist article goes on to point out that workers pay is subject to the whims of the labor market, while stock options and other pay incentives encourage managers to create more wealth for shareholders. Prices in the labor market are being kept from increasing largely due to the increased competition in the global economy. Managers on the hand are harder to outsource and competitors, having similar skill sets, are also looking for higher pay. Another factor that The Economist (2008) points out is that as a company’s assets grow so do the salary expectations of management.

Conclusion

Politicians like to talk in short sound bites, thus forming populist opinions as evidenced by the John McCain quote. As soon as politicians insist on “fixing” a perceived problem, there will be a shortage of managers in publicly traded firms. Why is that? In reality shareholders do determine managements pay through the election of the Board of Directors. Certainly cases of egregious disregard for the shareholders welfare can be found, but in most cases managers have a stake in building shareholder value encouraging maximization of stock value. Individual shareholders may not wield much power, but legislation regarding pay for management simply will not work.
Stockholders take risk in order to get a reward and as risk goes away so does reward. Managers control the direction of the company and shareholders should want the best management team money can buy. If the board determines that severance pay is needed to facilitate the departure of a CEO to get a new direction started, that should be acceptable to any shareholder.

References

Mason, J. (2008, June 10). McCain wants low corporate taxes, regulated CEO pay. Retrieved June 19, 2008, from http://biz.yahoo.com/rb/080610/usa_politics_mccain.html
The Economist. (2008, June 12). Executive pay: Let the fight begin. The Economist. Retrieved June 19, 2008, from http://www.economist.com/opinion/displaystory.cfm?story_id=11535704.

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To help with retirement preparations, the U.S. government has released an extremely helpful and easy-to-use retirement savings calculator to help you calculate and understand your IRA and other retirement finances. To learn more about it, why it works and where you can get it - keep reading.

Introduction

The guide, titled “Taking the Mystery Out of Retirement Planning” was published by the Department of Labor and the Employee Benefit Security Administration. It’s 62 pages long and takes you through a series of worksheets and information to help you discover how big of a nest egg you’ll need to retire comfortably and how much must save to achieve that.

How to Locate It

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Features of the Calculator and Guide

Probably the best feature of this retirement planning guide is how simple it is to use. The text is easy to read, the graphs are easy to understand and it’s actually interesting to read through - not a chore. Another great feature is how diverse and versatile this small publication and calculator really is. It talks about portfolio diversification, at-home children, split families and more.

The other great feature is that this seemingly simple booklet and guide make some fairly complex assumptions. For example, most retirement financial planners will just assign a generic inflation value to everything. But, this guide understands and accounts for the fact that costs like health care actually inflate at a higher and faster rate (typically double).

Drawbacks to the Guide

The comprehensive guide attaching this new government calculator has one key drawback - it’s targeted predominantly at individuals who are about a decade away from retirement. And while the tools can help certain retirees, those closer to or already in retirement won’t get much out of this material.

The other drawback is that there is little advice for people who suspect they may incur extra health care costs or the expense of dealing with potential dependents.

That said, it’s still a fantastic retirement savings calculator. Overall, it’s a simple tool which is easy to use and yet still very complex. It also has a firm grasp of government regulations. Finally, it’s free so you could hardly ask for anything more.

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