Thank you for inviting me to speak to the House Committee on Employment Relations, Training, and Safety on the preemption of local living wage laws. I am pleased to see that there is vigorous debate on a matter of such importance to the people of Michigan. This Committee has primary responsibility among the members of the legislature for assuring that Michigan law treats workers fairly, but at the same time should always bear in mind that those same workers are also taxpayers. There is considerable evidence that living wage laws only increase the difficulties faced by unskilled, low-wage workers. Given the financial responsibilities of the state of Michigan to municipalities, and the state’s current budgetary difficulties, preemption of local living wage laws is entirely appropriate.

A living wage is nothing other than a super-minimum wage imposed by municipal government, as opposed to state or federal government. It applies only to firms doing business with the local government. State and federal minimum wage statutes preempt local wage ordinances that would apply to all other private firms. Failure of the state to preempt living wage laws defeats the statewide wage laws established by this legislature and invites municipalities to invade other areas of state employment law, such as the state’s collective bargaining law or occupational safety and health standards.

The Alleged Need for Living Wage Laws

The stated objective of living wage law supporters is to reduce poverty by increasing the incomes of low-wage workers. The leading nationwide advocate of living wage laws, the Association of Community Organizations for Reform Now, argues that living wage ordinances are needed because, and I quote, "Our limited public dollars should not be subsidizing poverty-wage work . . . Public dollars should be leveraged for the public good – reserved for those private sector employers who demonstrate a commitment to providing decent, family-supporting jobs in our local communities."¹ Hence the standard that is typically used to calculate a "living wage" is based on the poverty line for a family of four. Living wage laws in Michigan tend to be a bit more generous, however, calling for a living wage of around $10 an hour, or allowing a lower wage of around $8.50 an hour if the employer provides health benefits.²

But while it is entirely natural to have sympathy toward the poor, including the working poor, if there is one group among the poor for whom there are grounds for optimism, who are least likely to need further assistance in the form of governmental mandates in order to find their way out of poverty, it is those poor who have nonetheless found work – even if it is minimum wage work.

Poverty is not a permanent state of affairs, especially for the working poor. In a free-flowing labor market even low-wage workers learn skills or at least gain a reputation for reliability that they can use to gain raises or new, higher paying employment. All the evidence indicates that is precisely what is happening out there. Low income workers are not stuck in low-wage work as long as they can remain employed long enough. The evidence shows that it may take as little as a year for a low-wage worker to advance to a better-paying job.

Research by the Employment Policy Institute shows that full-time minimum wage workers receive an average raise of 14 percent in their first year.³ Another EPI report shows that 47 percent of families living below the poverty line in 1997 managed to make it over the poverty line in 1998. The authors of that study concluded that "earnings from minimum wage work and the Earned Income Tax Credit both significantly reduced the number of working poor in the 1990s."⁴

In short, the "dead-end job", in which individuals are unable to find better employment, leaving them trapped in "poverty wages", is largely a myth, especially in a growing economy. The "working poor" are perfectly capable of working themselves out of poverty without any further government intervention. The living wage may speed up the process a bit for some, but relatively few of the beneficiaries of the living wage are likely to be poor individuals supporting families.

The Economic Impact of Living Wage Laws

It is not at all clear that the wage increases mandated by these statutes actually go to the working poor. Census data indicate that in Michigan the bulk of workers earning $6.65 per hour or less (the current minimum wage is $5.15 per hour) are not the sole support for a family with children. Around 19 percent are single or married without children. Another 18 percent are from dual-earner households that may or may not include children. More than half, 53 percent, live with a parent or relative. Of minimum wage and near minimum-wage workers, only 10 percent were the sole earners in families with children. The average family income for workers earning $6.65 an hour or less is over $50,000 – well above the poverty level.⁵

Among the other 90 percent there are, no doubt, many who bear their own hardships: a disabled spouse or parent, for instance. And even without dependents, living on a minimum wage job is not glamorous. But it is clear from these figures that the living wage is likely to benefit many who have no particularly pressing need for financial assistance.

We’ve looked at who benefits, now consider who loses: those unable to find work because potential employers cannot afford the increased wages mandated by living wage laws.

Labor economists refer to the "elasticity" of demand for labor, to describe the ratio of jobs gained or lost when wages change. Estimates of this "elasticity" vary, but the average estimate by labor economists is that for a 10 percent increase in the minimum wage, employment among those affected drops by 2 percent. Since the typical living wage law in Michigan calls for roughly a doubling in wages, this leads to an estimate that 20 percent of workers covered by the living wage law will lose their jobs as a result.⁶ Professor David Neumark of Michigan State University argues that this elasticity may understate the effects of living wage laws on employment, and that the job losses may be higher.⁷

Those same labor economists will also tell you that the "elasticity" of demand for teenage workers is less severe than that of low-wage workers overall, in other words, proportionally fewer teenagers will lose their jobs as a result of a wage increase. Consequently the job losses will fall more heavily on older workers – who, it stands to reason, are more likely to have dependents.

The Cost of Living Wage Laws

Having presented evidence that living wage laws are unnecessary or even counterproductive as a means of alleviating poverty, I would like to conclude by addressing the question of why the legislature should intervene in this area. After all, these living wage laws are enacted by local governments, which ordinarily should be allowed some latitude to make their own policies.

But the burdens created by living wage laws do not fall entirely on the municipalities that enact them. When workers are laid off, they draw unemployment funds that are paid for by employers that frequently have locations across the state. Families with dependent children eventually draw on state welfare programs if the "breadwinner" is unable to find work soon enough.

Living wage laws are likely to increase the cost of local government more directly. Firms may be hesitant to bid on local government contracts if a living wage law will disturb their own pay scales. Depending on how the ordinance is drafted, a company with one city contract could find itself forced to give substantial company-wide pay increases.

Even if the application of living wage is limited to those working directly on a municipal contract, the disruption of having separate wage schedules could lead companies to pass up municipal contracts, lessening competition and driving the cost of government even higher.

It should be remembered that all these communities rely on state-generated revenues for a large portion of their expenditures. In the upcoming fiscal year, the city of Detroit expects revenue sharing with the state to generate more than 14 percent of its budget – over $500 million – most of which will go into that city’s general fund.⁸ And except for sheer size Detroit is not at all unusual; for the city of Ann Arbor state revenue sharing accounted for $13 million, over 15 percent of the city’s budget, last year.⁹

The state is certainly within its rights to insist that this money be spent in the most cost-effective manner possible. That means local contracts should go to the lowest qualified bidder, with a minimum of strings and conditions added by local government. It is also quite proper for the state to preempt laws that increase the burdens of public assistance programs, which the living wage law is likely to do.

Conclusion – Good Intentions, Poor Economics

The living wage movement is well intentioned. But by failing to account for the economics and demographics of low-wage workers, it has produced ordinances that backfire more often than they work. Few of the benefits of living wage ordinances go to poor families. The state will ultimately be forced to pick up a significant portion of the bill. That will include greater demand for revenue sharing from municipalities that have passed living wage laws. The state will also be forced to adjust for an increased need for social services to the families of those who are unable to find work. In light of the likely costs to both poor families and taxpayers across the state, preemption of local living wage laws by the Michigan Legislature is an appropriate response.

Paul Kersey, J.D., is labor research associate at the Mackinac Center for Public Policy, a nonprofit, nonpartisan research and educational institute. More information is available on HB 4160 at www.michiganvotes.org.

1. http://www.livingwagecampaign.org

2. Keeping Michigan on Track, The Mackinac Center for Public Policy, 2002, p24

3. Even and McPherson, Rising Above the Minimum Wage, January 2000

4. Formby, Bishop, and Kim, The Economic Well Being of Low-Income Working Families

5. http://www.epionline.org/study_detail.cfm?sid=46

6. Fuchs and Krueger, Economists’ Views About Parameters, Values, and Policies: Survey Results in Labor and Public Economics, Journal of Economic Literature, Vol. 36, pp 1387-1425

7. Do Living Wage Ordinances Reduce Urban Poverty? Available online at http://www.nber.org/~confer/2000/lss00/neumark.pdf

8. City of Detroit, 2002-2003 Budget, Revenue by Major Source

9. Telephone conference with Ken Bogan, Ann Arbor Finance Dept. February 18, 2003