Laws Can't Make Workers More Valuable
For years, FEE has stressed the supremacy of sound economics over the political process. If people understand how markets work, and the vital link between free markets and personal liberty, they will support the right policies and the men and women in public office who implement those policies. Those who stress politics first, and concentrate their resources and efforts there, are putting the proverbial cart before the horse. Now from Detroit comes painful evidence of how true this principle is.
On November 3, Detroit voters overwhelmingly approved a so-called “living wage” ordinance that requires employers with at least $50,000 worth of city contracts or financial assistance to offer a minimum hourly wage of $7.70 if health benefits are included or $9.63 if they are not. Furthermore, the law requires that employers hire only city residents. Violators are subject to a $50 per day penalty and may have their city contract or grant revoked as well. The city’s already bloated bureaucracy will get larger now because contracts will have to be monitored for compliance, which also means that businesses will be forced to reveal confidential payroll information.
This is magic-wand economics at its worst: Want higher wages? Just pass a law making it illegal to pay anything less than some arbitrary amount. Presto! Supply and demand, profit and loss, incentives and disincentives all mean nothing if you can get what you want through the force of law.
Of course, there’s nothing in the ordinance that will make workers more productive, only less affordable. A city that has already driven out a million people and countless businesses with a tax burden more than six times the average for Michigan municipalities will now become even less competitive and economically attractive. David Littmann, senior economist at Detroit’s Comerica Bank, estimates that the ordinance will wipe out about 7 percent of the city’s jobs by the year 2000. Incredibly, Mayor Dennis Archer, who publicly supports the living-wage concept, headed to Washington within days of the vote, seeking federal assistance (that is, other people’s money from all over America) to help keep businesses from leaving Detroit.
And it isn’t just businesses that will be affected. Nonprofit charities will be too. For example, two Salvation Army sites in Detroit receive $300,000 from the city. Most conservative estimates put the new law’s cost to the Army at $1.5 million. The Army will have to raise an additional $1.5 million, lay off workers, or become independent of the city.
Every argument against the minimum wage—long familiar to readers of The Freeman—applies in spades to living-wage proposals like Detroit’s. The law can’t make a person worth $5.15 an hour (the current federal minimum) by making it illegal to pay him any less. By mandating an even higher minimum, the living wage prices even more people out of work. The people who push these cockamamie ideas never seem to ask why any employer would hire someone at $7.70 if that person’s services are only valued in the marketplace at, say, $5.
Moreover, by imposing more unnecessarily costly employment arrangements, the new law will require more city revenue or reduced city services. The long and short of it is this: though some workers may keep their jobs and even see their wages hiked, others will pay the price in the form of fewer jobs or higher taxes. Unemployment resulting from the law will boost the public welfare rolls in a city where the poverty rate—at 30 percent—is already the highest of American cities.
Detroit, sadly, is not the first municipality to engage in such foolishness. In 1994, Baltimore became the home of the country’s first living-wage law. Portland (Oregon), Milwaukee, Minneapolis, St. Paul, Jersey City, Boston, and Los Angeles have all adopted similar ordinances. Last fall, the city council of San Jose, California, began debate on a living-wage ordinance that would set minimum hourly pay at an astounding $12.50 plus benefits for employees performing work for the city. On top of that, the San Jose proposal stipulates that any contractor who takes over a city job previously performed by another entity would be forced to hire the same people who had been doing that work before.
Who is behind these silly laws? In Detroit, the ballot language was drafted and the campaign funded by none other than organized labor. Why? Because a city floor under wages will stifle the unions’ low-cost competition and make it more difficult for the city to contract out for services. This is not organized labor playing the role of Florence Nightingale. It is the cannibalization of fellow workers by greedy, self-interested union bosses.
Nationally, the living wage effort is being led by a group known as the Association of Community Organizations for Reform Now (ACORN). Like the unions, ACORN is no paragon of either altruism or intellectual consistency. Even as it was arguing for the federal minimum of $5.15 and lobbying for sky-high living wages in a number of places across the country, ACORN filed a lawsuit in California in an attempt to exempt itself from paying its own employees the state’s then-current $4.25 per hour minimum wage. In its legal brief, the organization declared that “the more that ACORN must pay each individual outreach worker . . . the fewer outreach workers it will be able to hire.” Hypocrisy has rarely been on more arrogant display.
Meanwhile, some people and certain business organizations in Detroit that have long viewed the promotion of free-market economics as “too controversial” for their tastes are now reaping the bitter harvest of their “moderation.” In challenging the new law in the courts, they may spend far more than they ever spent on behalf of economic education. Whether they learn anything from it all remains an open question.
Too often, in Detroit and elsewhere, the schools don’t teach sound economics; or worse, they teach the toxic stuff. Businessmen devote too much of their resources to politics and too little to the right ideas that can really make a lasting difference for the better. That’s why living-wage nonsense succeeds in becoming law. We shouldn’t be surprised at the results, and we should be ashamed if by our action or inaction we’re part of the problem.
