Detecting Effects of Living Wage Laws DAVID NEUMARK and SCOTT ADAMS* We estimate the effects of living wage laws on wages of low-wage workers, focusing on the timing of policy, spurious associations, and the type of living wage law passed in a city. Our estimates point to sizable positive wage effects in cities with broad living wage laws that cover employers receiving business assist- ance from the city. We also explore disemployment effects of living wage laws and find evidence consistent with tradeoffs between wages and employment. BEGINNING WITH THE PASSAGE OF BALTIMORE’S LIVING WAGE ORDINANCE IN DECEMBER 1994, many cities in the United States have imple- mented living wages. When this research was completed, there were approx- imately 70 living wage ordinances in effect in the United States (most in cities, but some applied to counties or school boards) and numerous cam- paigns for more under way. Living wage ordinances typically mandate that businesses under contract with the city, or in some cases, receiving assistance from the city must pay their workers a wage sufficient to financially support a family. One common feature of living wage ordinances is a wage require- ment that is much higher than the traditional minimum wages set by state and federal legislation. For example, by the end of 2000, the living wage in Baltimore, the first city to pass a living wage law, was $7.90. In some cities, such as San Jose and San Antonio, the living wage could exceed $10 (and in Santa Cruz, the living wage is currently $11, or $12 without health ben- efits). Many living wage ordinances explicitly peg a wage to the level needed for a family to reach the federal poverty line, indicating that the overriding goal of living wage ordinances is to alleviate poverty in the jurisdictions in * The authors’ affiliations are, respectively, the Public Policy Institute of California, the Department of Economics, Michigan State University, and the National Bureau of Economic Research; and the Department of Economics, University of Wisconsin–Milwaukee. E-mail: [email protected] and [email protected]. We are grateful to Eli Berman, John DiNardo, David Levine, seminar participants at Harvard University, the Kansas City Fed, the University of Illinois, the University of Missouri, PPIC, Rand, UC-Berkeley, UC-Santa Cruz, the University of Washington, and anonymous referees for helpful suggestions. This research was supported in part by the Michigan Applied Public Policy Research Funds, the Broad Graduate School of Management, and PPIC. Any opinions expressed are those of the authors alone and do not necessarily reflect any position of the Public Policy Institute of California. I R, Vol. 42, No. 4 (October 2003). © 2003 Regents of the University of California Published by Blackwell Publishing, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford, OX4 2DQ, UK. 531 532 / D N S A which they apply. Our longer-term research agenda is concerned with the success of living wages in achieving this goal.1 In the article we address a critical first step in research on living wages. In particular, we attempt to establish whether “first order” effects of living wages are observed, in the form of increased wages of low-wage workers. We also go beyond an analysis of wage effects to examine the most obvious tradeoff that may occur if there are wage increases, specifically employment reductions. There are two potential reasons why first-order effects of living wages on wages may not be observed. First, there is no existing research documenting the extent of compliance with living wage laws [in contrast to minimum wage laws (Ashenfelter and Smith 1979)], and it is conceivable that they are largely ignored or not enforced. This consideration would suggest that a failure to find wage effects should push researchers and policymakers to focus on the implementation and enforcement of living wage laws. In con- trast, if an impact of living wage laws on the wages of low-wage workers is detected, this would provide evidence that living wage laws are effective and may have broader effects than might be suggested by their frequent limita- tion to coverage of city contractors. Second, because living wage laws appear to be targeted on a very narrow group of workers, it may be impossible to detect living wage effects using the standard datasets—most prominently the Current Population Survey (CPS)—that labor economists and other researchers use to study policies with geographic variation, such as the minimum wage, but also welfare or other income-support programs, antidiscrimination legislation, and unemploy- ment insurance, to name some prominent examples. This consideration would suggest that a failure to find wage effects implies that such datasets are not useful in evaluating the effects of living wage laws. Instead, researchers would have to rely on ex ante calculations or simulations—as has been done in a set of city-specific consulting reports and other studies designed explicitly to study workers and firms affected by living wage laws. This would be unfortunate because the CPS provides a large-scale dataset covering essentially all metropolitan areas in the Unites states, permitting generaliza- tions to be drawn, providing “control group” cities where living wages have not been implemented, and readily allowing comparisons with other policies in effect at the same or different times. 1 The figures in this paragraph and cited elsewhere in this article applied at the time this research was completed. Detecting Effects of Living Wage Laws / 533 Living Wage Laws Existing Laws. Living wage laws differ in two important ways from min- imum wage laws. First, they specify coverage that is not universal. Summary information on living wage laws is reported in Table 1 for the 21 cities with such laws that are sufficiently large to study with the CPS in our sample period. Column 1 provides information on who is covered by the living wage law. While coverage varies by city, laws tend to apply to some or all of the following groups: contractors or subcontractors (most commonly), employers receiving business assistance from the city, and city employees (least commonly). The living wage laws covering employers receiving business assistance, which figure prominently in the ensuing analysis, are sometimes vague and somewhat heterogeneous. For some cities, the provision is relatively general. For example, the ordinance in Minneapolis refers to employers receiving economic development assistance, whereas in Los Angeles and Oakland the ordinances refer to financial assistance generally, which presumably could entail grants, tax abatements, etc. For others, more specific criteria are pro- vided. For example, San Antonio’s living wage law covers businesses receiv- ing tax breaks, and Hartford’s law covers commercial development projects receiving more than $100,000 in city subsidies or financing. Second, living wages often are high relative to the wage floors set by federal or state minimum wages. The wage levels associated with living wage laws are reported for these same cities in column 2 of Table 1. In many cases (e.g., Hartford and Minneapolis), these wages are pegged to the poverty level for a family of a specified size. In addition, the required wage is some- times higher if health insurance is not provided.2 Table 2 provides descrip- tive information comparing the levels of living wages with minimum wages and the wages of relatively low-wage workers, highlighting the wide gaps in most cities between legislated living wages and minimun wages and some- times also between living wages and wages at the low end of the labor market. All the living wages except Buffalo’s exceeded the federal minimum wage ($5.15) by at least 30 percent in 2000, and the median living wage ($8.19) was 59 percent higher.3 In Hartford and San Jose, living wages exceeded the federal minimum by at least 82 percent and the higher state minimum wages effective in these cities by more than 52 percent. Looking 2 In the empirical analysis reported in this article, we always use the lower wage with health insurance (if there is one), but the qualitative conclusions were not sensitive to using the alternative higher wage. 3 Of course, had the real value of the minimum wage been preserved over the 1980s and 1990s, this comparison between living wages and minimum wages would appear less pronounced. 534 / D TABLE 1 I L W La Other Estimates of Affected Workers and Coverage Specified in Share of Workers in Legislation Wage Provisions Bottom Quartile N City (1) (2) (3) Baltimore Construction and service Passed in December 1994 but wage requirements were as Niedt et al. (1999): contracts > $5000 follows: July 1995 (6.10), July 1996 (6.60), July 1997 1494–5976 (0.51–2.05%) (7.10), July 1998 (7.70), July 1999 (7.90) Boston Contractors > $100,000; 100% of poverty level: September 1998 (8.23), July 1999 subcontractors > $25,000 (8.35), July 2000 (8.53) Buffalo Contractors and 6.22 with health benefits; 7.22 without: January 2000 S subcontractors > $50,000 (6.22) (> 10 employees) Chicago Contractors and subcontractors July 1998 (7.60) Tolley et al. (1999): 9807 (1.01%) A Dayton City employees 7.00 with health benefits; 8.50 without: April 1998 (7.00) Denver Contractors and 100% of poverty level (assuming 2080 annual hours): subcontractors > $2000 March 2000 (8.20) Detroit Contractors, subcontractors, 100% of poverty level with health benefits, 125% Reynolds (1999): 2300 and financial assistance without: December 1998 (8.23), March 1999 (8.35), (0.40%) recipients > $50,000 March 2000 (8.53) Durham Contractors, city employees January 1998 (7.55) Hartford Contractors > $50,000; 110% of poverty level with health benefits: October 1999 commercial development (9.19), March 2000 (9.38) projects receiving subsidies > $100,000 Jersey City Contractors 7.50 with health benefits: June 1996 (7.50) Los Angeles Service contractors > Indexed annually for inflation.