Acton Commentary

The Living Wage: A Moral and Economic Evaluation


Because various living-wage proposals are currently part of the public debate, a moment of reflection on this important issue is necessary. No doubt, proponents of living-wage legislation invoke the language of justice, fairness, and ethical norms, because they recognize the centrality of giving laborers their just due. This language, however correct, may obfuscate the subtle moral and economic distinctions that are necessary in order to determine whether such legislation will have its desired effects. In fact, the reality may be that harm will be done to the very people whom the living-wage activists are trying to assist.

Precisely because this debate is essentially one of justice, it is important to make a few basic moral distinctions. First of all, Christianity has always professed that human beings have dignity, weight, and worth because they are created in the image of God. All human beings, regardless of gender, race, creed, or ability, are deserving of respect and justice.

Second, human beings possess creativity. Our needs are met and our humanity is most realized when we can apply our intellect and creativity to the nature of things. In the words of John Paul II, “Work is a good thing for man–a good thing for his humanity–because through work, man not only transforms nature, adapting to his own needs, but he also achieves fulfillment as a human being and indeed, in a sense, becomes more a human being.”

All Christians should realize the importance of work. And all Christians should seek to work toward justice in wages. No one wants to see the poor stuck in poverty or those at the bottom of the wage pool being forced to remain where they are. The issue, though, should focus on how to lift the poor out of poverty.

Proponents of the living wage believe they have found the means. If, through the use of legislation, the government can force employers to pay workers $10 or $12 or even $15 per hour, then the poor, these proponents believe, would no longer be in poverty.

Unfortunately, the economic reality and the unintended effects of the coercive power of government are not that simple. For those who want to understand the effects of implementing a living wage, it is important to have a grasp of this truth: When the government puts in place a certain public policy, there is always some response that comes from the marketplace. In public-policy circles, this is called the elastic effect. For instance, increasing the entrance fee to a public park by 5 percent would lead us to conclude, on the basis of logic, that the park would take in 5 percent more income than it did last year. But, in fact, this is not necessarily the case because increasing the cost may cause 10 percent fewer people to visit the park, resulting instead in reduced revenue.

The problem with the “living-wage solution” is that it leads to negative consequences that are equal to, or sometimes worse than, the problem that the policy sought to remedy. Studies over the past forty years indicate that even a legally determined minimum wage leads to fewer available jobs. If employers are forced to pay higher wages, then they tend to hire fewer employees. Labor economists, for example, point out that a 10 percent forced increase in wages would increase unemployment by 1 to 3 percent. Furthermore, companies that have a living wage imposed on them may be forced to move their operations to another location, resulting in a further loss of jobs. And finally, the extra costs produced by living-wage legislation will not be borne by the affected companies. The companies will, of course, pass along the costs to those who buy their products, which will include the employees who have just had their wages raised, thus making those same wages that much less “livable.”

Who are the people most likely to be affected by the elastic effect? The same poor people whom proponents of the living wage seek to help. Their jobs will be the first ones cut when employers decide that cost reductions are necessary to keep the business viable. Entry-level jobs, which low-income people badly need in order to get them started moving up the economic ladder, are the very ones that will disappear.

A wage that enables people to live above the poverty line is a noble goal, provided that it respects the rights of both employers and employees and is realized within the context of free negotiation. Certainly, employers have a moral obligation to pay a fair wage, but this does not mean that a governmental edict can accomplish this.

Simply put, wages, like the price of goods and services, are not the capricious decisions of employees; they are the response of business owners to what consumers are saying that they value. To disregard this economic law is to invite economic disaster.