‘Living Wage’ Kills Jobs

Original Article:

  • Author: Michael Saltsman

  • Publication Date: July 2010

  • Newspaper: Baltimore Business Journal

  • Topics: Living Wage

The labor subcommittee of Baltimore’s City Council on Thursday put a hold on Councilwoman Mary Pat Clarke’s plans for a citywide living wage of $10.57.

It’s unlikely we’ve heard the last of it, though.
The full council can choose to take up the legislation with a simple majority vote, and advocacy groups are already dialing up the pressure.

Paul Sonn, of the National Employment Law Project, is the latest to tout the benefits of a citywide living wage. Though Sonn’s desired outcome is noble, his policy prescriptions come laden with unintended consequences that could hamstring Baltimore’s labor market for years to come.

To hear Sonn describe the living wage in his recent op-ed, it’s a wonder that the policy is controversial at all. According to Sonn, jacking up employers’ labor costs by 50 percent will lead to a surplus of jobs for Baltimoreans and a stimulated economy.

But back in the real world, businesses have to deal with pesky things like profit margins that determine whether their doors stay open or closed.

Consider a grocery store. Recent data shows they typically operate with a 2 to 3 percent profit margin, which means the store keeps just a few cents in profit for every dollar they bring in. Under the $3.32 wage hike proposed by Councilwoman Clarke, a hypothetical chain grocery store averaging just over 1,000 minimum wage employee-hours per week could see their labor costs rise by over $180,000 in the course of a year. To generate enough profit to cover those new labor costs, that one grocery store would have to find $7 million in additional sales.

Some stores may pass the costs on to customers through higher prices. More frequently, however, employers figure out how to get the same amount of work done with fewer employees. Customers get used to bagging their own groceries and checking themselves out while less-experienced Baltimoreans learn to deal with life without a job.

Mr. Sonn uses lots of “free lunch” examples of how you can jack up wages without negative employment consequences. But, to take one example, he selectively omitted research demonstrating that job loss is exactly what happened in Santa Fe, N.M., after the city passed its own living wage ordinance. The city achieved their goal of a higher minimum city-wide at the expense of some of their working citizens. Economic research out of the University of Kentucky showed that one of the unintended consequences of Santa Fe’s new wage was an increased risk of unemployment and fewer hours worked for the city’s less educated.

Despite the damage done to businesses already in the city of Baltimore, a living wage mandate also kills jobs by erecting a big red “Keep Out” sign for larger retailers looking to locate inside city limits. Given the chance to pay $7.25 an hour to entry-level employees in the county, or over $3 more in the city, it’s far more attractive to put down roots just outside that city line. Jobs and tax dollars will both flee the city for the friendlier confines of Baltimore County.

Chicago’s Democratic mayor, Richard Daley, understood this. A few years back, the Chicago City Council passed similar living wage legislation, and Daley promptly vetoed it (his first veto after 17 years in office). Why would a business open in a locale that imposes unnecessary costs upon them?

Thursday night, one Councilmember on a two-member subcommittee had the courage to say no to
Councilwoman Clarke’s utopian and ultimately harmful vision of the labor market. The rest of Baltimore’s City Council may soon be called on to do the same. And they should do so with confidence: The laws of labor market economics are firmly on their side in this debate.