Living Wage: Policy Solutions

A Closer Look at Living Wage Ordinances

The living wage movement advocates local government wage mandates, called living wage ordinances (LWOs), applicable particularly to government contractors and employers receiving government subsidies or financial aid. However, if the purpose is to assist working low-income families within the jurisdiction, there are far better approaches, including targeted tax credits to employees. A wide array of federal, state and local government programs to assist low-income families already exist. Local governments can expand their programs to help families in need without relying on LWOs.

The Federal and State Governments Provide Assistance to Low-Income Families

The federal government runs a number of cash or in-kind assistance programs for working low-income families. In addition to the basic cash assistance welfare program- Temporary Assistance to Needy Families (TANF)-the federal government also provides assistance through food stamps, housing assistance, Medicaid, child tax credits, energy tax credits, and the earned income tax credit. A number of states also provide targeted relief to low-income working families, including packages of assistance for families leaving welfare.

The federal Earned Income Tax Credit is a particularly important program for low-income working families with children. In the tax year 2005, a two-child family with earnings below the poverty line would be eligible to receive up to $4,400 in tax credit or refund from the federal government.

Nineteen states (including the District of Columbia) also provide earnings-based tax credits that supplement the federal EITC. Most state programs “piggy-back” on the federal EITC. The state supplemental tax credits range from 5 to 50 percent of the federal credit. The tax credits are refundable in 15 states.

Two Local Governments Have Adopted Earned Income Tax Credits

Two local governments (Denver, CO, and Montgomery County, MD) have adopted their own earned income tax credit programs. Such local initiatives cost less than contractor-based living wage ordinances and reach more families genuinely in need.

There are several reasons why local targeted living wage tax credits are better than living wage ordinances:

  1. Tax credits do not raise employer costs and thus do not discourage employers from hiring low-skill job applicants.
  2. Targeted tax credits can reach more needy families in the jurisdiction at the same or lower cost than LWOs. This is because local governments bear the brunt of the cost increases from the LWOs and because much of the wage increases from the LWOs go to families and individuals without children and not in low-income families.
  3. Targeted tax credits are more effective than LWOs in boosting family disposable income (i.e., tax home pay). This is because the tax credits are not subject to payroll tax and not generally counted in determining eligibility for many government assistance programs. Therefore, the benefits delivered by the targeted tax credits are not as subject to reductions for taxes and lost benefits as are those delivered by LWOs.

The Employment Policies Institute Advocates a Targeted Living Wage Subsidy

The Employment Policies Institute has published a report, The Case for a Targeted Living Wage Subsidy, which identifies the specific advantages to a local government of adopting a targeted living wage subsidy rather than a LWO. Some of its major points are:

Based on research into the effects of living wage programs, it is possible to design a local targeted wage subsidy program that would have the same effect on the disposable income of workers in poverty but at much lower costs.

A local government can piggyback on the state or federal EITC for the employee base it wishes to support. For example, rather than adopting a LWO for contractors, a locality could enact a targeted wage subsidy for employees of contractors who are eligible for the state or federal credit.

We estimate that such a targeted wage subsidy could deliver the same benefits as a living wage mandate to workers in genuine financial need at 35 to 60 percent of the budgetary cost of the wage mandate. In a major city such as Los Angeles, this could translate into saving as much as $3 to $7 million annually. This comparison does not even consider the additional wage subsidy benefits of avoiding the loss of jobs and loss of work opportunities.

The targeted wage subsidy alternative is more cost-effective for three main reasons

  1. Based on research into the San Francisco and Los Angeles living wage ordinances, local governments are likely in the short run to absorb 50 to 75 percent or more of the living wage mandate’s increase in labor cost.
  2. Based on data from the U.S. Census Bureau, less than 30 percent of those workers who would benefit from LWOs are from families below twice the poverty line. However, all of the families reached by a targeted living wage subsidy would be in or near poverty.
  3. Finally, because many of the intended beneficiaries stand to pay payroll taxes or lose governmental assistance when their earnings rise, the untaxed wage subsidy allows them to keep more of their income and benefits. Thus, by redirecting the benefits to those in need by a means that is more tax advantaged than wages, the local government ends up paying less for the same gain to workers.