1	Do Living Wages Accomplish Their Intended Purpose? Aaron Yelowitz University of Kentucky Department of Economics
2	Key Issues Much of the economic focus is on the policy’s unintended consequences: Do living wages cause unemployment? Do firms move out of a city to avoid the living wage? Do firms subcontract to avoid paying the living wage? Do consumer prices increase to pay for the living wage?
3	Key Issues Other, less explored unintended consequences: Displacement effects – “labor-labor substitution” “Gaming the system” – Ordinance exceptions Human capital accumulation
4	Key Issues Economists focus relatively less attention on the policy’s intended consequences. This discussion will focus on whether a living wage achieves its intended consequences.
5	Key Issues Living wage is often motivated by concerns about poverty alleviation. Natural questions: What “tax rates” do low-income households face? Should income be defined as “cash income” or something else? How does the living wage affect total family income and earnings? Is the living wage well-targeted?
6	Key Issues Much of this presentation will draw on two recent studies: Toikka, Yelowitz, and Neveu (forthcoming 2004, Economic Development Quarterly) Yelowitz and Toikka (work-in-progress, discussion paper for Employment Policies Institute)
7	Tax Rates Many poor households take up transfer programs: Temporary Assistance to Needy Families (TANF) Food Stamps Public Housing Medicaid Numerous smaller programs These program impose high tax rates (illustrated in table 1)
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9	Tax Rates Assuming full take-up of programs: Average tax rate on first $30k of earnings was 98% The composition of income changes Poverty rates change based on cash definition
10	Tax Rates Recently offered testimony on Atlanta living wage ordinance ($12/hour without benefits) The Atlanta Living Wage Coalition has testimony from Santina Story, a 33-year-old mother of three, who worked full time and earned $6.75 an hour at the Crowne Plaza Hotel in Atlanta She likely faces tax rates of 75% on additional earnings (EITC, food stamps, federal+state, OASDI)
11	Defining Income The composition of income changes in Table 1, which leads to changes in poverty rates based on the cash definition. At $0 earnings, 26% of total income was cash At $10,000 earnings, 54% of total income was cash At $22,000 about 83% of total income was cash (not shown)
12	Defining Income Although total incomes are relatively unchanged at $0, $10,000, or $22,000 in earnings, the poverty classification does change Poverty definition is based on cash-income Illusory effect – “well-being” not changed much
13	Effect on Family Income In Yelowitz and Toikka (work-in-progress), we compare vulnerable households in cities that implemented a living wage to those that did not. The living wage had statistically insignificant effects on household total income and earnings. Moreover, for every $1.00 of increased earnings, cash transfers fell by $0.44.
14	Targeting Toikka, Yelowitz, and Neveu simulate the effects of a living wage across a number of large cities Of those affected by living wage, 75% did not live in poverty Of those affected by living wage, 40% had incomes greater than 200% of poverty line
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16	Targeting The data suggests that even using a cash-based measure of poverty, the living wage is not well-targeted Living wage targets individual earnings, not family income May benefit single individuals, teens, others who are not “at-risk”
17	Alternatives Are there alternatives to the living wage that lead to more desirable outcomes? One popular proposal is a state-level Earned Income Tax Credit (EITC). Center on Budget and Policy Priorities reports:
18	Alternatives EITC often is not counted as income for transfer programs. EITC, therefore, does not “crowd-out” transfer assistance which is composed of both federal and state dollars.
19	Alternatives EITC and living wage are not complements to each other; rather they are substitutes. The marginal earnings from the living wage end up in the EITC phase-out range of 21%.
20	Conclusions My research indicates that the living wage is a very blunt policy instrument for achieving its policy objectives. A better solution is a state Earned Income Tax Credit. EITC could target family income rather than individual earnings, and could target vulnerable households in a way the living wage cannot.
21	Conclusions I am delighted to answer questions, either today or in the future. Aaron Yelowitz’s email: aaron@uky.edu The full studies (and data) available at: http://gatton.uky.edu/faculty/yelowitz/ Thank you!