Lately, in Charlottesville and other communities, there has been much advocacy for a living wage. A living wage is defined as an hourly wage high enough so that a full time worker could support a family of four. Those in favor of a living wage argue that it is unfair to pay someone less and that companies paying less are just greedy. The most recent case involved the Marriot Corporations hotel on West Main Street.
I would like to suggest that the push for a living wage is misguided. None of my arguments should be new to anyone who has taken an introductory microeconomics course. One might argue with some of the analysis. But it is my hope that this page will at least focus the discussion better.
First of all, it is not really clear what it means to say support a family of four. How much is the hypothetical family spending on housing, on food, etc? I have a graduate student supporting a wife and child on an annual income of $6000. That translates into $3.00 (if he were working 40 hours per week for 50 weeks per year). While Im sure he would prefer to earn more, he and his family members are not starving. I am not suggesting that people can live comfortably on $3.00 per hour. Rather, I am suggesting that there is nothing magic about $8.00 per hour.
More importantly, no one has a right to a job. A job is a privilege associated with developing skills necessary to perform the job and having good work habits. If you choose not to develop valuable skills or to perform poorly at a job, then you should suffer the consequences of that choice. Having a family of four does not entitle you to a job that pays a good wage. Instead, you should have a family of four only if you can support the family. If you do not have skills to earn enough to support a family of four, either develop the skills, work extra hours, have your spouse work, or dont have two children. All of these are choices. It may be hard for some to improve skills, but many people do it. In our present economy, almost anyone can get a second job. A high proportion of households have two wage earners; there is no reason why poor households have an entitlement to have a stay-at home parent.
Not all jobs are productive enough to pay $8.00 or more per hour. That does not mean that they should not be allowed. There are many low productivity activities that firms need performed and that people are willing to do at a wage (less than $8.00 per hour) that makes it worthwhile for the firm to hire someone. Some people, for example teenagers, use low paying jobs to develop some job skills and earn a little money. Taking away such jobs would limit the opportunities of such people. Others use low paying jobs as a stepping stone into better paying jobs. They need the lowing paying job because they do not have the skills to step right into a high paying job. Requiring firms to pay a high wage would limit training opportunities for such people.
Most empirical studies of minimum wage effects show that they raise wages (obviously) and reduce employment by moderate amounts. The big losers and winners are teenagers. Some teenagers win in that they get paid more than they otherwise would have. Others lose in that they are unemployed.
If the goal of the living wage is to raise earnings of low skill workers, then a much better way to accomplish the goal is to subsidize training opportunities for low skill workers and encourage them to take advantage of the opportunities. Such an effort would achieve the desired goal without reducing employment or raising prices faced by consumers. Imposing a living wage on employers of low skill workers is actually counterproductive because it deprives them of training opportunities. While the advocates of the living wage have their hearts in the right place, their proposed solution is misguided.
Steven Stern (electronic mail, July 4, 2001).
is a professor of economics at the University of Virginia.