6 July 2000

A Growing Cancer: "Living Wage" Sure To Cause Economic Death

The City of Manhattan has been considering a "Living Wage" ordinance put fourth by the Manhattan Alliance for Peace &
Justice. This is the group that does not want to be called Liberal, Socialist, or Communist. They know the citizens of
Manhattan would not let this "Living Wage" pass if it were being proposed by a far left organization.

It just happens that the citizens of Manhattan have elected three or four members of the same organization. If not card caring,
they have the same liberal views. Because of this, the "Living Wage" issue is still being considered.

Last week Ed Klimek, the lone conservative on the Commission, gave this column written by the Federal Reserve Bank Vice
President to the other members:

A Growing Cancer:

"Living Wage" Sure To Cause Economic Death

By W. Michael Cox

Vice President and

Chief Economist

Federal Reserve Bank, Dallas

The rhetoric of the living-wage movement carries a seductive appeal. "Hard-working people," the advocates say,
"should be able to afford the necessities of life for themselves and their families." What could be wrong with
that?

Plenty. Though well meaning, this proposal would raise the cost of doing business, decrease job opportunities for
low-skilled workers and thwart the free marketís mechanism for recycling valuable labor.

Under the living-wage concept, a worker should earn enough toiling year-round at 40 hours a week to keep a
household out of poverty, defined as roughly $17,000 a year for a family of four. A living wage goes beyond the
minimum wage, a policy staple since the 1930s. The federal pay floor now stands at $5.15 an hour, but a living
wage would be $8.20 an hour and ever higher in large metropolitan area.

The living wage hasnít received as much attention as attempts to raise the minimum wage. Yet Chicago and
Baltimore are among 43 cities and counties imposing living-wage requirements on companies with which they do
business or otherwise assist. The Employment Policies Institute reports that living-wage campaigns are under
way in 88 cities including Los Angeles, Cleveland and Austin, Texas.

Free-market economists traditional arguments against minimum wages apply to the living wage and then some. If
government dictum replaces market reality, jobs will be lost, or never created in the first place.

When companies make decisions on hiring and firing, they will rid themselves of employees whose productivity
doesnít justify the higher pay. Finding jobs and gaining work experience will then become harder for Americans
who earn low wages.

In trying to justify higher pay for the working poor, proponents offer a thinly disguised version of a labor theory
of value. Most economists know that this hoary artifact of Marxist thought is a clunker.

In a free-enterprise system, pay depends on the value of whatís produced, not the time and effort expended on
making it.

Suppose someone were to work all day on something utterly useless, such as digging holes and filling them in.
Should their toil warrant any claim on goods and services? Thereís surely honest work in low-wage jobs, but the
market, with an impartial calculus, determines the worth of whatís produced and the pay of who produces it.

So now we arrive at the greatest harm of the living wage. By arbitrarily deciding pay, it interferes with the
collective preferences underlying the marketplace and its prices. Workers making $5.15 an hour will see that
their time and talent could be applied to more valuable endeavors elsewhere.

Low pay is part of the mechanism that the economy uses to move labor from less valuable uses to higher-valued
ones. Higher wages in other occupations should entice the low-paid workers to migrate, even if it means acquiring
the skills and prerequisites for the better jobs. Paying more than the market wage on the other hand provides a
false signal that workers whose talents could be better used elsewhere should instead stay put.

Economic progress brings the vast majority of Americans great benefits, including higher living standards, better
working conditions and more leisure. It quickens when labor and other resources move freely in response to
market signals. It slows when we underutilize societyís most important asset, its scarce labor.

Imposed at first by just a few cities, the living wage once might not have appeared to threaten the robust U>S>
economy. But thatís part of its danger: Minor disruptions in one place or another have provided a justification for
advocates to urge expansion to more and more cities, and eventually to state and even national levels.

Like a slow-moving cancer that the body at first doesnít recognize, the living-wage movement threatens to spread
across the nation, and that could bring the death of Americaís long economic boom.