Santa Fe's Living Wage Misguided
By Micha Gisser and Kenneth M. Brown
This opinion piece first appeared in the Albuquerque Journal
on July 10, 2004
On June 24, a New Mexico District Court judge upheld Santa Fe's
"living wage" law. Businesses and their employees should
appeal the judge's ruling because the law will benefit a few workers
but will overwhelm these benefits with costs that others would bear.
Santa Fe's Living Wage Ordinance was enacted in 2002. It initially
applied to city employees, employees of firms with service city
contracts of $30,000 or more, and certain recipients of economic
development assistance from the city. Now the city council has extended
the ordinance to every business in town employing 25 employees or
Minimum wages would initially rise to $8.50 an hour, to $9.50 an
hour in January 2006, and $10.50 in January 2008. For comparison,
note that the federal law sets a minimum wage of $5.15 an hour,
or $2.13 an hour for tipped employees. By contrast, the Santa Fe
ordinance would boost the minimum wage for tipped employees to $5.50.
Most of the unskilled workers in Santa Fe are in hotels, restaurants,
shops, supermarkets and grocery stores.
The major negative impact of minimum wage laws is unemployment
among unskilled workers mainly teenagers, women and minorities
leading to heavy economic losses to these groups. This has been
documented many times for minimum wage laws at the national level.
These impacts are likely to be even greater for small towns that
enact "living wage" laws because many firms can avoid
the extra labor cost simply by moving to another town.
Two factors will cause unemployment among the unskilled workers
First, the substitution between labor and capital. Faced with a
higher minimum wage rate, employers would invest in less labor-intensive
machinery that would enable them to hire more-skilled workers at
the expense of less-skilled workers.
Second, the rise in the price of services rendered by the affected
industries would drive up prices, thus inducing consumers to purchase
less resulting in worker layoffs. For example, higher prices
charged by hotels would induce some opera fans to return to Albuquerque
rather than spend the night in Santa Fe after the opera. Some number
of tourists from around the country would change their plans too.
The smallest businesses aren't covered by the new law, but some
of those in the 25- to 100-employee range may not survive. For example,
The Marketplace Natural Grocery in Santa Fe has some 80 full-time
employees. Of those, the majority are clerks, stockers and baggers
who earn less than the proposed "living wage."
This small store faces competition from chain stores like Whole
Foods and Wild Oats that could absorb temporary losses until they
invested in labor-saving machinery. For their smaller competitors,
the increase in labor costs might be fatal.
There will be other economic disruptions, stemming from poor targeting,
that are less visible. For example, some firms might counteract
the higher wage by reducing the fringe benefits they offer. Thus,
the "living wage" in these cases would have no net benefit
to workers. Indeed, since wages are taxable and fringe benefits
aren't, workers might well be made worse off.
Other examples of poor targeting are tipped employees and employees
from a family of two or more earners.
First, even with a minimum wage of $5.50, a tipped waiter may be
earning something like $15 an hour. This tipped employee is likely
not poor, just a student who earns some extra money during the summer
that would help defray his tuition and room and board while attending
Second, poor targeting will increase the incomes of teenagers and
unskilled women in two- or three-earner families. The worst case
scenario is that of a household of two wage-earners, where one member
earns $40,000 annually and the other earns $7 an hour. Together
they earn $54,560. Raising the minimum wage rate from $7 to $9.50
in 2006 would add $5,200 to their annual income.
The logic of the "living wage" or, more correctly, the
mandatory minimum wages, is flawed. Basically, it is the philosophy
that a government can force producers to pay employees more than
the value of their contribution to production. Economic theory is
very straightforward in this issue: If we want to raise the wages
of unskilled laborers we should induce them to become more productive
by acquiring more schooling and better skills either on the
job or at schools.
Gisser is UNM professor emeritus of economics and a senior fellow
at the Rio Grande Foundation. Brown is a research director for the