The Economic Effects of Living Wage Laws

Abstract

For many years, Canadian governments have tried to legislate higher earnings for low-wage workers. Living wage laws are a relatively new policy that gained prominence in American cities starting in the mid-1990s. Currently more than 140 American municipalities have a living wage law. In 2011, the City of New Westminster in British Columbia became the first and only Canadian city to adopt a living wage ordinance. This report reviews the scholarly research on living wage laws from the United States and concludes that the US experience should make us cautious about adopting this policy more widely in Canada.

Living wage laws are similar to minimum wage legislation. Both mandate by law that workers be paid a certain wage rate. However, living wage laws differ by their coverage (covering a much smaller group of workers) and by their amount (requiring a much higher wage). At $19.62 per hour, New Westminster’s living wage is nearly double the provincial minimum wage of $10.25 and much higher than the rate in American cities.

The explicit principle underlying living wages is to ensure full-time workers and their families meet a predetermined living standard promoted by activists. But both economic theory and evidence suggest that living wage ordinances, like minimum wage legislation, create distortions in the labour market that have a negative impact on employment. When governments mandate a wage above the prevailing market rate, a typical result is that fewer jobs and hours become available and it is usually the people who are less skilled who are most adversely affected.

And contrary to what advocates claim, living wage policies are not the answer to the hardships experienced by many impoverished families, in part because the overwhelming proportion of those benefiting from living wage laws tend not be poor.

In addition to the negative effects upon employment, living wage laws have the potential to inflate city budgets through higher public service costs. Since the research into living wage laws is still in its early stages, many studies have not yet focused their assessments on these costs, which will inevitably be paid for by taxpayers and renters. When evaluating the costs and benefits of any proposed living wage ordinance, it is critical to include these other costs in the analysis.

Keywords: Labour market