E X E C U T I V E
S U M M A R Y
The Living Wage and the City of Philadelphia
Andrew J. Buck
Professor of Economics
- Philadelphia is twelfth among America's twenty-five largest, poorest cities.
- At $5.15 the minimum wage has 22% less purchasing power than it did in 1967.
- About 5% of Philadelphians with jobs earn this wage and live in households below the poverty line.
Thinking about the Employment Impacts of a Living Wage
- The living wage is a targeted minimum wage, so research on the latter provides an instructive baseline.
- The visceral response to a change in the minimum wage omits consideration of:
- Workers are not widgets: Asymmetry in bargaining power þ worker is paid less than her value to the firm.
- Higher wages þ less turnover, more productivity þ more employment
- Fixed proportions among inputs.
- A more reasoned response will include consideration of:
- A 40% increase in the wage of minimum wage earners will increase the firm's cost of goods sold by about 2%.
- A wage increase will result in higher aggregate income for covered workers. A large portion of this higher income is spent and accrues to others as income. The cycle continues, stimulating demand for goods and services, and hence labor, in the local economy.
- Low wages can be used to subsidize a firm's inefficient operation. An increase in the wage can result in incentives to innovate in order to raise productivity
Statistical Evidence on Wages and Employment
- The most comprehensive review to date (Card and Krueger, 1995) concludes that when an employment effect is observed, positive or negative, it is very small and falls mostly on part-time teenagers.
- Recent case studies of the fast food industry report, on average, no employment effects of an increase in the minimum wage.
- In case study results firm owners report an intent to improve productivity in order to offset a wage increase.
A Tale of Two Cities
- Real cost of city contracts declined.
- No meaningful change in firms interested in bidding on city contracts.
- Assessable business property (excluding real estate) increased in the year after the ordinance, ending a five-year decline.
- A survey of city contractors found no reduction in staffing.
- Compliance costs have been $0.17/year per capita.
- Los Angeles
- The total cost of the wage increase for the targeted group would not result in an increase in the city budget, there would be no loss of employment, and no loss of city services.
- The living wage would also reduce the reliance on public assistance in the targeted group by as much as 50%.
- If all costs of the living wage were passed on to the city then the city's budget would rise by about 2%
The Living wage is about raising wages and reducing poverty in a targeted group in a city with about 30% of its population living in poverty. On the basis of the Baltimore and L.A. experience, and informally reported impacts for New York City's living wage ordinance, the cost to the City of Philadelphia would be modest, perhaps on the order of $2 million dollars. The living wage ordinance would boost incomes of the lowest wage workers by a total of more than $20 million. As this increase is spent and accrues to others as income the total, citywide impact could be as high as $70 million. The wage tax on this increase in income would amount to nearly $3 million, more than offsetting the increase in the city budget necessary to pay for the living wage in the first place.