Reflections on the Living Wage


Andrew J. Buck

Professor of Economics

Temple University

  1. Are the Affluent Really Different?
  2. At the time of the 1997 Current Population Survey there were about 672,000 residents of Philadelphia who were working. At the same time there were about 1,714,000 Pennsylvania residents of the Philadelphia suburbs who had jobs. Some salient characteristics of the two groups are summarized in Table 1. In the former group 38% held low wage jobs, while in the latter group only 32% held low wage jobs. This is a statistically significant difference. Since 48.3% of job holders in Philadelphia are non-white and only 7.7% of suburban job holders are non-white, there is de facto economic apartheid being practiced in the southeast Pennsylvania region. Indeed, an employed Philadelphian is about nine times more likely to be a low wage earner and African American than is a suburban worker.

    Table 1

    The Working Poor in Philadelphia and its Suburbs



    PA Suburbs

    Earning less than $7.90/hour



    Low wage African-American workers



    Families receiving housing subsidy



    Families in public housing



    Receive food stamps



    Receive energy assistance



    Receive public assistance or welfare



    Receive Medicaid



    Employer or union provided health insurance



    Source: Prepared by the author from the 1997 CPS

    The extent of this apartheid is even more striking in the context of public assistance for the working poor. The overall population in the Pennsylvania suburban counties is about twice that of Philadelphia. In spite of this, the number of families living in subsidized housing in Philadelphia is twice that in the suburbs. There are four times as many families living in Philadelphia's public housing as there are in the suburbs. Nearly 50% more Philadelphians receive food stamps than do suburbanites. Four times as many Philadelphians as suburbanites receive assistance with their energy bills. Only half as many suburbanites are on welfare as Philadelphians. About two and one half times as many Philadelphians receive assistance from Medicaid as do residents of the suburbs.

    As far as employer, occupation, benefits and longevity on the job, the affluent and the working poor are also different. The two industries that employ the greatest number of working poor in Philadelphia are the retail trades and personal services, 24% and 11% respectively. Of those earning more than $7.90, only 12% work in retailing and less than 3% work in personal services. The most common occupation among those earning more than $7.90 is managerial or administrative. The most common occupation among those earning the minimum wage is clerk. Among the working poor of Philadelphia, only 24% receive health benefits from their employer or union. In the suburbs this proportion is 41%. A member of the working poor is three times as likely to work for two or more employers during the year as a more affluent person.

    The inevitable conclusion is that southeast Pennsylvania has become racially divided, separate and unequal. By comparison to a suburbanite, a resident of Philadelphia is more likely to be earning less than $7.90 per hour, receiving public assistance of one kind or another, receiving less in fringe benefits, changing employers more often, and working in a low level job resulting in more job turnover. Philadelphia needs a living wage in order to restore some dignity to work and some economic parity between city and suburbs.

  3. Laissez Faire
  4. The notion that less government intervention in the market place is better than more has been around since Adam Smith published The Wealth of Nations in 1776. An argument against the living wage is that it is another example of government dictating the terms of employment to businesses. In other words, it is just one more regulatory policy and is therefore bad.

    The conservative doctrine about regulation is worthy of consideration. In markets that satisfy a number of stylized criteria, any regulation moves the economy away from efficiency; the economy is producing less than it can at higher prices. However, economists have consistently argued that regulation may be necessary to correct for certain market failures; pollution, for example. Furthermore, if there is a market failure, or as soon as a single regulation is introduced, the economy will be moved away from a first best organization. These features of the market place need to be recognized and policy makers must begin to seek a second best solution.

    The simple matter is that the workplace is filled with policies and regulations affecting employment. Discrimination and safety in the work place are two of the more common market failures that regulation is meant to correct. The Davis-Bacon Act, and its state and local variants, is used to ensure that some employers do not exploit non-union labor to win government contracts. Minority set asides are used to provide minority access to contracts and jobs. The Occupational Safety and Health Administration has oversight of the workplace. The affirmative action laws affect relations between employers and workers and among workers. Without the policies implemented by these laws and agencies the world of work would be far different. The costs of production might in fact be lower without Davis-Bacon, OSHA, and other realities of employment, but the quality of life might also be lower. The public will was that workers should be protected, and there was sufficient political courage to bring these changes into the workplace.

    It is a fiction to believe that the government of Philadelphia does not already intervene in the labor market. For example, the city uses minority set asides for both business ownership and employment. A prevailing wage ordinance governs the wages paid to construction workers on city contracts. The City regularly negotiates tax abatement with large firms for the purpose of luring jobs to the city. There are enterprise zones in which businesses receive special tax treatment in connection with new jobs. The Philadelphia Industrial Development Corporation provides subsidized loans to businesses that bring new jobs to the city, or keep existing jobs in Philadelphia. But there is one flaw in all of the laudable initiatives meant to increase employment in Philadelphia. None of them address the wages paid by the firms receiving the taxpayers' largesse, in the sense of ex post accountability. In the instance of the living wage ordinance before City Council, government intervention in the market place is aimed at fine tuning existing labor policy. A living wage ordinance articulates what the City expects to receive for the taxpayers' dollars that have been invested in private businesses. Since job creation, occupational health, and equal employment access have been addressed it is now time to address the terms of employment for low wage workers.

  5. The Business Climate: Perceptions and Reality

For years there was a perception that Philadelphia was hostile to business. The fact that employment in the City has declined for most of the last thirty years is cited as the consequence of this hostility. Indeed, at the Economic Development Committee's hearing on the Living Wage Ordinance the Greater Philadelphia Chamber of Commerce (GPCC) documented the decline in employment. Their testimony then tried to connect that decline to the living wage proposal. It was their position that a local minimum wage would further buttress the City's image as hostile to business. However, the fact is that the average wage paid in Philadelphia has declined over the last 30 years. The GPCC's exhibit and the historical record leaves one with the inescapable conclusion that wages had better start rising soon, before all jobs have left the City.

A second implication of the GPCC's testimony is that there are lower cost places than Philadelphia in which to do business. That is a disingenuous assertion for two reasons: First, only one place can claim to be lower cost than all others; and some place will have the dubious distinction of being highest cost. But in between there is a vast middle ground. Indeed, Philadelphia is lower cost than the national averages on many dimensions.

If we compare Philadelphia with its suburban neighbors, then at least on the cost of labor dimension the City is a winner. As noted in table 1, only 24% of workers in Philadelphia receive health insurance coverage. In the suburbs that figure is 41%. The direct cost of labor is also cheaper in Philadelphia. Table 2, based on the Current Population Survey of 1997, shows earnings for full time workers in Philadelphia and its Pennsylvania suburbs. The table is broken down into hourly, weekly and annual reported earnings since respondents report their income in any of the three ways. In every case Philadelphians earn less than their suburban counterparts.

Table 2

Direct Labor Costs

(Figures in parentheses are number in the sample)


PA Suburbs

Hourly Wage Earners

$10.38 per hour

$11.40 per hour

Weekly Salary

$516.31 per week

$646.56 per week

Annual Earnings

$30,303.00 per year

$40,591.00 per year

Author's calculations from 1997 CPS, based on full year, full time workers.

Those suburban workers reporting their earnings on an hourly basis earn almost 10% more than their Philadelphia counterparts. For those reporting a weekly salary the gap widens to 25%. The difference balloons to 34% for those reporting their salary on an annual basis. Even if one adds in the city wage tax, labor costs are lower for the City than for the suburbs.

If Philadelphia has an image problem to overcome, it is not one of high cost labor. The city and its businesses can easily afford to bring a little parity into the gap between city and suburban workers.