Wednesday, July 18 , 2018, 8:43 pm | Fair 67º

 
 
 

Harris Sherline: The ‘Living Wage’ Is a Bad Idea, Part II

Raising the pay rate for the least-qualified employees produces costly ripple effects

[Noozhawk’s note: This is the second in a two-part series. Click here for the first part.]

An important consideration in evaluating the “living wage” is related to the compensation that is paid to all employees based on their qualifications or positions and length of service.

Harris Sherline
Harris Sherline

For example, if the minimum wage is raised to $12 or $15 an hour from $8, it would lift the pay rate of the lowest, least-qualified employees to that of other employees who are better qualified and generally have longer length of service. This would necessitate more pay increases to continue recognizing the greater skill and length of service of other employees, and the pay scales for each succeeding higher category of employees would be pushed up accordingly.

Thus, what might first appear to be a simple pay increase for just the lowest-paid employees in the organization would quickly lead to a comparable wage hike for everyone. This would cause an across-the-board increase in payroll costs, plus the accompanying increase in the cost of benefits that automatically occurs. Those added costs might be well beyond the ability of many firms to absorb and could cause layoffs or price increases — or both.

The net result most likely would be the exact opposite of what “living-wage” policy advocates intend. There would be a reduction in the number of available jobs in the community because employers would be forced to cut other costs. Although some employees certainly would benefit from an increase in the minimum (“living”) wage, others would lose their jobs to offset the higher costs.

The Employment Policies Institute reported that “at least one of the leading proponents of living wages — the Association of Community Organizations for Reform Now (ACORN) — readily admitted in a (California) court case that higher minimum wages lead to job loss.” It also “stated that ‘California’s minimum wage laws ... affect the quality and quantity of staff’ the organization can hire.”

In 1996, when the Chicago City Council was considering “living-wage” legislation, it found that it would cost the city $20 million a year, plus an additional 20 percent of this amount ($4.2 million) for administrative costs to certify, monitor and enforce the ordinance. It also determined that the labor costs of the affected firms would increase by $37.5 million. Even firms that were already paying the required minimum wage to employees would see their costs rise as a result of the compliance requirements that would be imposed by the city.

The Chicago experience identified three key concerns that any city or county government should consider before embarking on the road to a “living-wage” ordinance: overall cost, efficiency of the policy and job loss.

As to cost, even the most scaled-down version of such legislation can cost a community millions of dollars. Chicago found that the living wage would be an extremely inefficient use of city resources, if the goal is to help the heads of households increase their earnings. For one thing, any analysis of the benefits that employees would derive from this policy should include the impacts of federal and state income taxes, Social Security taxes, possible reductions in the earned income credit, and reduced food stamp and Medicaid benefits. These factors are generally overlooked by those who support the “living-wage” policy.

Finally, loss of jobs: Any consideration of living wage legislation also should estimate the potential loss of jobs among the least skilled workers and whether more people would be forced onto the welfare rolls as a result. A study conducted by Peter Brandon at the University of Wisconsin found that in states that raised their minimum wage, welfare mothers stayed on welfare an average of 44 percent longer than those in states that didn’t raise minimum wage rates.

From my perspective, the “living wage” looks like a loser for any jurisdiction that decides to adopt this policy. Almost everyone loses — local government, taxpayers and those businesses that are directly affected. The only winners seem to be the few minimum-wage employees, whose paychecks would be raised to the higher minimum, and the unions, which use the new minimum as a basis for bargaining to increase the pay levels of all their members.

According to the city of Santa Barbara, the 83 workers who benefited from the “living-wage” ordinance in the 2010 fiscal year cost the city $171,725. In addition, the city would like to expand the number of employees covered by the “living wage” to more than 700 part-time workers, at an estimated annual cost of $1.1 million.

At a time when governments at every level are being challenged to reduce costs, and considering that the Santa Barbara police are being asked to accept a sizable cut, how can the city’s leaders justify increasing compensation for other employees?

There are far more effective and less costly ways to help a small percentage of minimum-wage employees that also will make us feel good in the process.

The “living-wage” policy may be motivated by good intentions, but it is a bad idea.

— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog, Opinionfest.com.

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