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Living Wage: What It Is and Why We Need It.

Economics textbooks enthuse en·thuse  
v. en·thused, en·thus·ing, en·thus·es Usage Problem
To cause to become enthusiastic.

 about the virtues of a price system. In a market economy, nobody needs to order people to economize e·con·o·mize  
v. e·con·o·mized, e·con·o·miz·ing, e·con·o·miz·es

1. To practice economy, as by avoiding waste or reducing expenditures.

 on a scarce commodity or make extra efforts to produce it: Scarcity leads to a high price, and sheer self-interest does the rest. Conversely, nobody needs special persuasion to take advantage of an underemployed un·der·em·ployed  
1. Employed only part-time when one needs and desires full-time employment.

2. Inadequately employed, especially employed at a low-paying job that requires less skill or training than one possesses.
 resource: Abundance will make it cheap, and again self-interest will take it from there.

And yet there is a problem with markets: They are absolutely and relentlessly amoral a·mor·al  
1. Not admitting of moral distinctions or judgments; neither moral nor immoral.

2. Lacking moral sensibility; not caring about right and wrong.
. Labor, in a market system, is just another commodity; the wage a man or woman can command has nothing to do with how much he or she needs to make to support a family or to feel part of the broader society. Some conservatives have managed to convince themselves that this poses no moral dilemma, that whatever is, is just. And one supposes that there are still unrepentant socialists who believe that one can do away with market determination of incomes altogether. But after a century marked by both the Great Depression--which basically ended unalloyed un·al·loyed  
1. Not in mixture with other metals; pure.

2. Complete; unqualified: unalloyed blessings; unalloyed relief.
 faith in markets--and the fall of communism, most people support some version of the welfare state: a system that is based on markets, but in which the government tries to prevent too unequal a distribution of income.

But how is that to be accomplished? The standard economist's solution, which is also the main way the U.S. welfare state operates, involves "after-market" intervention: Let the markets rip, but then use progressive taxes and redistributive transfers to make the end result fairer. However, many liberals have always felt that this solution is unsatisfactory. Instead, they want to increase "market" wages, notably through support of collective bargaining collective bargaining, in labor relations, procedure whereby an employer or employers agree to discuss the conditions of work by bargaining with representatives of the employees, usually a labor union. , and through the imposition of minimum wage standards.

The "living wage" movement, which has attracted considerable support in several major U.S. cities, is a variant on this tradition. As described in Robert Pollin Robert Pollin is an American economist and activist. He is a professor economics at the University of Massachusetts-Amherst and founding co-director of its Political Economy Research Institute (PERI).  and Stephanie Luce's new book Living Wage, it essentially involves putting a floor on wages not through a conventional minimum wage law, but by requiring minimum wage standards of firms that do business with a local government. Aside from novel enforcement issues (I know this lawyer who will explain to you about creating dummy companies for the contract work, leaving the rest of the business unregulated), this is basically a distinction without a difference: The living wage movement is simply a move to raise minimum wages through local action.

So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card David Edward Card is a Canadian labor economist and professor at the University of California, Berkeley.

Card earned his B.A. from Queen's University in 1978 and his Ph.D. in Economics in 1983 from Princeton University.
 and Alan Krueger, find that where there have been more or less controlled experiments "Controlled Experiment" is an episode of the original The Outer Limits television show. It first aired on 13 January, 1964, during the first season. Introduction
A martian controller is assigned to investigate the phenomenon of murder on Earth.
, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages "do," in fact, reduce employment, but that the effects are small and swamped by other forces.

What is remarkable, however, is how this rather iffy if·fy  
adj. if·fi·er, if·fi·est Informal
Doubtful; uncertain: an iffy proposition.

[From if.
 result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda--for arguing that living wages "can play an important role in reversing the 25-year decline in wages experienced by most working people in America" (as this book's back cover has it). Clearly these advocates very much want to believe that the price of labor--unlike that of gasoline, or Manhattan apartments--can be set based on considerations of justice, not supply and demand, without unpleasant side effects Side effects

Effects of a proposed project on other parts of the firm.
. This will to believe is obvious in this book: The authors not only take the Card-Krueger results as gospel, but advance a number of other arguments that just do not hold up under examination.

For example, the authors argue at length that because only a fraction of the work force in the firms affected by living wage proposals will be affected, total costs will be increased by only 1 or 2 percent--and that as a result, not only will there be no significant reduction in employment, but the extra cost will be absorbed out of profits rather than passed on in higher prices. This latter claim is wishful thinking wishful thinking Psychology Dereitic thought that a thing or event should have a specified outcome  of the first order: Since when do we,think that cost increases are not passed on to customers if they are small enough? And the idea that employment "of the affected workers" will not suffer because the affected wages are only a small part of costs is a non sequitur non sequitur (nahn sek [as in heck]-kwit-her) n. Latin for "it does not follow." The term usually means that a conclusion does not logically follow from the facts or law, stated: "That's a non sequitur."  at best. Imagine that a new local law required supermarkets to sell milk at, say, 25 cents a gallon. The loss in revenue would be only a small fraction of each supermarket's total sales--but do you really think that milk would be just as available as before?

They also argue that because there are cases in which companies paying above-market wages reap offsetting gains in the form of lower turnover and greater worker loyalty, raising minimum wages will lead to similar gains. The obvious economist's reply is, if paying higher wages is such a good idea, why aren't companies doing it voluntarily? But in any case there is a fundamental flaw in the argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage "compared with other companies"--and that is precisely what mandating an increase in the minimum wage for all companies cannot accomplish. What makes this an odd oversight is that the book contains a lengthy and rather well-done critique of attempts by local governments to create jobs through investment incentives, arguing that they mainly end up in a zero-sum poaching poaching: see cooking.  war; how could the authors have failed to notice the parallel?

But while there is much that is silly in their book, Pollin and Luce are diligent and honest--and as a result the book carries lessons and implications they may not have intended. The most interesting section is their estimates of the impact of living-wage proposals on the budgets of hypothetical families--estimates that perhaps give us the clue to what all this is really about.

Consider, for example, the effects of "Plan Y" (never mind) on the hypothetical head of a household, currently making $5.43 an hour. According to according to
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

 their estimates, as long as he or she remained fully employed, the living-wage law would raise earned income Sources of money derived from the labor, professional service, or entrepreneurship of an individual taxpayer as opposed to funds generated by investments, dividends, and interest.  from $10,860 to $14,500--and also mandate $2,500 in health coverage. (This is, incidentally, a 57 percent increase in the cost to employers; you have to have a lot of faith in Card-Krueger not to worry that some jobs might be lost.) According to their numbers, that family would currently pay less than $900 in taxes while receiving some $9,700 in benefits such as food stamps, Earned Income Tax Credit The United States federal Earned Income Tax Credit (EITC) is a refundable tax credit that reduces or eliminates the taxes that low-income married working people pay (such as payroll taxes) and also frequently operates as a wage subsidy for low-income workers. , and health care. Their calculations also show that most of the gains from the living wage proposal would be offset by reductions iff these other redistributive programs. Indeed, only about one-fifth of the mandated increase in wages and benefits actually gets manifested in disposable income disposable income

Portion of an individual's income over which the recipient has complete discretion. To assess disposable income, it is necessary to determine total income, including not only wages and salaries, interest and dividend payments, and business profits, but also
; the rest is taken away as benefits decline.

Now to me, at least, the obvious question is, why take this route? Why increase the cost of labor to employers so sharply, which--Card/Krueger notwithstanding--must pose a significant risk of pricing some workers out of the market, in order to give those workers so little extra income? Why not give them the money directly, say, via an increase in the tax credit?

One answer is political: What a shift from income supports to living wage legislation does is to move the costs of income redistribution Income redistribution refers to a political policy intended to even the amount of income individuals are permitted to earn. This differs slightly from wealth redistribution or property redistribution, a policy which takes assets from the current owners and gives them to other  off-budget. And this may be a smart move if you believe that America should do more for its working poor, but that if it comes down to spending money on-budget it won't. Indeed, this is a popular view among economists who favor national minimum-wage increases: They will admit to their colleagues that such increases are not the best way to help the poor, but argue that it is the only politically feasible option.

But I suspect there is another, deeper issue here-namely, that even without political constraints, advocates of a living wage would not be satisfied with any plan that relies on after-market redistribution. They don't want people to "have" a decent income, they want them to "earn" it, not be dependent on demeaning de·mean 1  
tr.v. de·meaned, de·mean·ing, de·means
To conduct or behave (oneself) in a particular manner: demeaned themselves well in class.
 handouts. Indeed, Pollin and Luce proudly display their estimates of the increase in the share of disposable income that is earned, not granted.

In short, what the living wage is really about is not living standards living standards nplnivel msg de vida

living standards living nplniveau m de vie

living standards living npl
, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price--determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality a·mor·al  
1. Not admitting of moral distinctions or judgments; neither moral nor immoral.

2. Lacking moral sensibility; not caring about right and wrong.
 of the market economy is part of its essence, and cannot be legislated away.
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Author:Krugman, Paul
Publication:Washington Monthly
Article Type:Book Review
Date:Sep 1, 1998
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