In the latest opportunity for good intentions to lead to unintended consequences, we have organizations such as the Flint Hills Living Wage Coalition and the Lawrence Coalition for Peace and Justice seeking support for local "living wage" laws. Living wage laws force companies contracting with local units of government, and those receiving special tax incentives, to pay employees wages ranging between $7.50 and $14.50 an hour, substantially more than the federal minimum wage. Ironically, such laws will ultimately harm many lower paid workers and should not be adopted by Kansas communities.
These groups appear to be motivated by concerns regarding companies receiving tax subsidies and the desire to improve the lives of a few lower paid workers. If living wage laws worked as planned, the tax savings being enjoyed by favored businesses would be passed along to lower-paid workers.
While the intentions are good, the plan simply won't work. Furthermore, those who are critical of government tax subsidies to businesses should remember that two wrongs don't make a right.
The living-wage idea is based on a naive notion of how the economy works. Proponents make their case as if the economy is like a room of fine furniture. Workers are sitting on the chairs in the room, and some chairs are nicer than others. If we don't like the upholstery on someone's chair, we can just reach into the room and reupholster it hoping that we don't damage the other pieces of furniture.
Inevitably, the hand of government doing the reupholstery has too many thumbs to be effective, and the economy doesn't work this way. Jobs are more like boats on a lake. If we change one worker's boat, we will rock the boats of other workers as ripples move across the water.
As the effects of living wage laws ripple across the economy, there will be far more costs than just those being borne by the companies getting tax breaks. Prices of goods and services in the community will rise, and business development will be hampered. The cost of administering the law will also be substantial. However, the most significant cost of mandating a raise in wages for a few lower paid workers will be borne by other lower-paid workers.
When businesses are forced to pay significantly higher wages, they hire fewer workers. Consider what is happening in our economy today. The market has increased wages. As a result, employers are looking for ways to get by with less service and they are turning to younger, less-experienced, and less-expensive workers. Grocery stores, for example, are even experimenting with automated checkout lines that substitute for experienced cashiers.
Companies covered by living wage laws will hire fewer workers, leaving more workers to compete for the remaining lower paid jobs in the community. The gains to a few workers from a living wage law will be made at the expense of lower wages for all other lower-paid employees of businesses not covered by the law. The greatest cost of such laws will be borne by the very group these laws are intended to help.
This is not speculation. Economists have studied for many years the wage and employment effects of minimum wage laws. Living wage laws are identical to minimum wage laws that cover only a portion of employers. Study after study has found that increases in minimum wages cause a combination of unemployment and higher prices within the sector of the economy covered by the laws and lower wages in the uncovered sector. Recent studies find that lower income families suffer a disproportionate share of this negative impact.
These unintended consequences cannot be avoided by simply widening the coverage of the law to more businesses. Wider coverage just means more unemployment and higher prices.
If the Lawrence-based Coalition for Peace and Justice is genuinely concerned about justice, it should consider the irony of proposing a law that will make some lower-paid workers better off at the expense of making other lower-paid workers worse off. This sounds more like random cruelty than justice.
A study conducted by economists David Card and Alan Krueger will likely be cited in this debate. The study found that increases in minimum wages increased employment. However, this study has been widely rejected by economists because of serious flaws in its methodology. The findings are totally inconsistent with economic theory and literally hundreds of reputable studies. Most economists give this study about the same amount of credibility that biologists and paleontologists give the "creation science" view of evolution.
These are extraordinary economic times. We are enjoying over ten years of sustained economic expansion and impressively low unemployment. These are the results of hard working people competing to discover new products and better ways of producing and delivering those products. These are fruits from the free market, not from the visible hand of government.
We could do more good if we help lower-paid workers discover what skills employers need, help them understand how to develop those skills, and show them where the higher paying jobs are. Rather than undermine the free market, society would be better off helping lower paid workers use their own skills and creativity to participate more fully in the opportunities that already exist.
Keith Chauvin is associate dean for academic affairs at the Kansas University School of Business..