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Stephanie Luce

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Crying Wolf Over Higher Wages in a Time of Need

Posted: 12/09/10 01:52 PM ET

For more than 100 years, we've heard opponents "Cry Wolf" when governments tried to establish living wage or minimum wage laws, threatening higher unemployment and inflation. Introductory economic textbooks warn of just that. But fortunately economic analysis has advanced beyond the introductory level. More economists are testing theories once taken for granted, and using better methodologies they are proving wrong those who "Cry Wolf" about living wage laws.

Their timing could not be better. More than one-quarter of all U.S. workers earn hourly wages below the federal poverty line. Census data shows that the proportion of workers considered to be the "working poor" fell throughout the 1990s as cities passed living wage laws and the federal government raised the minimum wage. But without regular increases to the minimum wage, the number of "working poor" is rising again. In 2008, almost 9 million Americans were classified as "working poor," almost 2 million more people than in 1998.

The problem isn't that workers are not working hard enough. Productivity has soared in recent decades. The problem is a crisis of living wage jobs. Yet opponents rely on false arguments that wage laws (and unions!) hurt workers, when in reality the only way average wages rise in a country is when workers organize and push for better laws.

New data released last month adds another solid piece of evidence that higher wage levels do not force employers to lay off workers. Labor economists Arin Dube, William Lester and Michael Reich compare counties adjacent to state borders, where one state raised the minimum wage and another did not, between 1990 and 2006. The authors improve on previous studies that did not control for local economic conditions, and find no correlation between higher minimum wages and employment.

Another new study out last week, by William Lester and Ken Jacobs, looks specifically at living wage ordinances that cover economic development projects. They find no difference in employment levels between the living wage cities and comparable cities, disproving the claim by critics that the laws can drive away business or lead to reduced employment.

As more and more work comes out disproving the claims of those who "Cry Wolf", we keep hearing from a handful of economists not ready to let go of old theories. Most notable is the discredited David Neumark, who along with co-author William Wascher, gained notoriety in a famous case of dueling minimum wage studies in the 1990s. A restaurant industry-funded foundation promoted Neumark and Washer's work, arguing that it proved higher minimum wages led to job loss in the fast food industry. Yet after some outside scrutiny, researchers found the Neumark study did not really find evidence of job loss.

David Neumark also happens to be one of the economists selected by Mayor Bloomberg to conduct a $1 million study of the potential impact of a proposed living wage ordinance in New York. The high price tag for the study is itself shocking, given what it usually costs to conduct studies of this kind. (Bloomberg could have saved the money and given a living wage raise to almost 200 full-time workers for a year!)

But the selection is also surprising given that Neumark is already author of 27 studies that argue that municipal living wage ordinances lead to job loss. Many of these studies use the same kinds of flawed methodologies we see in minimum wage research.

The study by Dube, Lester and Reich shows that blunt methodologies may not be appropriate for understanding the way labor markets function -- especially for low-wage workers who are likely underrepresented in government data sets, have higher turnover, and more likely to work in contingent part-time jobs.

Similarly, research by economists Mark Brenner, Robert Pollin and Jeannette Wicks-Lim challenged some of Neumark's living wage research, arguing the need to take a careful look at the dynamics of living wage ordinances if we want to understand their impact. For example, Neumark uses a national government dataset to measure the impact of local living wage laws. Since living wage ordinances do not affect a large proportion of workers in a city, this particular dataset of 60,000 households may not include any living wage workers -- in fact, the odds of the sample including a large enough number of workers covered by the ordinance are about one in 244 million. Living wage ordinances are targeted at specific low-wage workers. If we really want to understand their impact we need to use more responsive methodologies.

Interestingly, many economists are coming to share this perspective. A few decades ago a majority of them would argue that wage laws could have strong negative outcomes. Today, the field is increasingly convinced that those initial claims were inflated -- and benefits from a wage increase would likely outweigh any costs. Even those economists who focus on the negative impacts admit that they would be small, and likely contained to certain subsectors, like teenagers. Though even here, the empirical studies seem to find no negative impacts on teens.

While the discipline of economics is shifting its estimation on wage laws, journalists and pundits are slow to catch on. Perhaps some are still citing their Intro Econ textbooks from 20 years ago. Recently a New York Post column by Gregory Bresiger proclaimed that that a proposed New York living wage ordinance "could kill city economy, employment," despite the fact that not even the economists who oppose minimum wages would make this argument.

With the City of New York set to debate a living wage ordinance it looks like we are in for a long season of "Crying Wolf."

Stephanie Luce is an Associate Professor at the Murphy Institute, City University of New York. She is the author or co-author of three books and dozens of articles on living wage ordinances.