'Living wage' idea sounds better than it is in real world

By DAVID MOON, Moon Capital Management
October 7, 2001

In a recent forum, the candidates for Knoxville City Council were asked about their position on the notion of a "living wage" for city employees. The "living wage" is loosely defined as a wage that allows an employee to live with dignity and out of poverty. The goal is laudable; full-time city employees should be able to support themselves with their honest, hard work.

That goal sounds great, except for one thing: the solution makes no logical sense. Increasing the minimum wage for city employees does nothing to address the root of all economic inequalities: productivity. The lowest paid city worker earns $8 an hour, almost $3 above the federal minimum wage. (All full-time city employees receive the same benefits.) These $8 jobs are very important, but require less skill than operating a piece of heavy machinery or running a crime investigation unit. If folks are concerned about the pay of the lowest paid among our city's employees, the best solution is to increase the productivity and skill set of those employees so they can perform higher value tasks. Raising someone's pay by fiat does nothing to address the core issue. It exacerbates and perpetuates it.

If we could legislate prosperity, why not propose a living wage of $50 an hour? These employees would spend their newfound money in local stores, increasing city sales tax revenues. They would buy bigger, more expensive homes, which would increase property taxes to the city. People would leave their low-paid jobs in the private sector to work for the government. Never again would we have to worry about losing our best and brightest from among our young adults; they would all be in the City County Building.

The only problem is that the market determines the value of everyone's work. The government cannot change the value of anyone's work; it can only change the price. When the price and value of a thing differ, the market will force a (usually) painful correction. (See the NASDAQ Composite over the last 21 months for a good example.) Market forces have rendered the minimum wage laws in this country irrelevant. McDonalds pays above minimum wage. Babysitters earn $8 an hour or more. If an employee of any business (or municipality) decides he is underpaid at $8 an hour, he can work somewhere else; the market will quickly tell him if his perception of his skills is consistent with reality.

This issue is apparently more important to its proponents than to many city employees. The single best indication of the appropriateness of an employer's pay plan is that employer's ability to retain employees. Underpaid employees leave their jobs for more fertile grounds. This is not happening to the city of Knoxville. The living wage proposal is a solution in search of a problem.

It is easy to favor a living wage proposal; who would be against people making more money? Proponents are caring and enlightened; critics are insensitive. But these plans actually risk hurting the people their proponents claim to want to help. Increases in federal minimum wages typically cause a decrease in employment of the lowest paid workers. In 12 cities where living wage ordinances have been enacted, some employees ended up making more money, a few worked fewer hours (increasing their hourly wage but not their annual income) and some lost their jobs. This does not sound like a great outcome.

Where states increase their minimum wages, welfare recipients remain on welfare 44 percent longer than states without the increases.

Increasing government payments to people, without corresponding increases in productivity or market influences, increases peoples' dependence on government and the generosity of legislative bodies. These government subsidies become a pawn in another political game. It is much better to let the market, rather than special interest politics, determine wages.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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