November 30, 2010

There's no harm in a "living wage", oh really?

There are proposals around the country right now which suggest the need for a "living" or "prevailing" wage. These are not new ideas. However they are being seen more and more in the media lately. The Center for American Progress Action Fund recently released a study which concluded that there is NO negative economic effects for requiring businesses (receiving government subsidies) to pay a living wage and/or prevailing wage. I found this quite negative effects for forcing businesses to raise wages.

The study was done by monitoring 15 cities employment growth and comparing that to control cities. They found that the employment growth of cities who initiated wage standards on government subsidized jobs. They said that this study proved that imposing wage standards across the board would not negatively effect the competitiveness of a city, county, state, etc.

One of the key things that they failed to address was the fact that the only businesses they studied were already being manipulated by the government. This analysis has no real information about the effects of increased wage standards on competitive businesses and the competitive markets between states and countries. They suggested that a government funded project like building a stadium creates jobs, and that we should make them "good" jobs by imposing a "living" wage of $10.00 and a "prevailing" wage of $24.00. This only works when the government, who is imposing these wages is footing th bill for the project. Taking an example of an
inefficient situation (government funding projects like stadiums and parks etc.) and adding to that the increased inefficiency of imposed wage standards is in no way a "comprehensive" look at how imposing wage standards across all businesses in a given city, state, or nation effect that area's competitiveness.

A relevant way of looking at how increasing imposed wage standards will effect businesses would be to look at economic, labor models. This model represents the effects of imposing a "living" or "prevailing" wage, which is simply a glorified minimum wage.
When a minimum wage is imposed, a labor surplus will occur. This means that the ever dreaded unemployment will increase. The surplus of labor, or the unemployed will be equal to the area in the upper triangle between the wage equal to 4.20 line (red) and the supply and demand lines. If these people really wanted to add jobs and improve things for people living in these cities they would not increase the minimum wage and thus their unemployment, because unless the government is footing the bill, businesses will decrease their demand for labor at these increased wages.

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