Raising pay to cut poverty

When government sets wages, funny things can happen

In the early 1990s, Baltimore, Md., was among the most blighted of America’s blighted downtowns. Its poverty rate was twice the national average. Drugs, crime and decay abounded. Its own local paper, the Baltimore Sun, called it a “Third-World city.” In response, the city embarked on a massive experiment in urban rehabilitation and anti-poverty policies. This included something called the “living wage.”

Baltimore’s living wage policy required all city employees, as well as anyone working for a contractor doing business with the city, to earn an hourly wage of at least $6.10 per hour—substantially above the then-minimum wage of $4.75. The goal was to lift full-time local workers out of poverty by ensuring their wages were sufficient to support a family. The efficacy of a living wage in fighting poverty has been the subject of much debate, but it has also been widely copied. Since 1994, 140 other American cities, including New York City, Detroit, Chicago and San Francisco, have adopted similar policies.

Now, after more than a decade in the spotlight, the living wage is making its way to Canada. This time around, however, it’s not poor cities leading the charge. It’s the richest.

Calgary is on track to become the first Canadian city to adopt a living wage policy early next year. The Regional Municipality of Waterloo, in southwestern Ontario, is close behind. And the small rural municipality of Pelham, Ont., near Niagara Falls, is also considering the concept. All three areas are notable for above-average incomes.

According to Derek Cook, research social planner with Calgary, his city’s living wage proposal is “recognition that having a job in Calgary doesn’t necessarily mean you are not in poverty.” Despite one of the tightest labour markets in the country, Cook argues significant numbers of working Calgarians find themselves at food banks or in homeless shelters because a full-time minimum wage income fails to provide the necessities of life. The Calgary proposal, if adopted by council, would see all city employees and contract staff (such as cleaners) guaranteed a municipal minimum hourly wage of $13.25, well above the $8.75 provincial minimum. “We will be raising people out of poverty,” argues Cook. Of course taxpayers may ask: at what cost?

Cook claims bringing city employees up to a living wage will cost taxpayers only $400,000 per year. Most staff already make more than $13.25. As for contracted labour, he figures the extra expense will be insignificant. U.S. research suggests most cities experience very small increases in contract costs—typically one per cent or less of total city expenses. This is because city contractors tend to swallow higher labour costs as lost profit rather than raise their bids. There are exceptions, however. In Baltimore, janitorial contracts rose 16 per cent.

But while the direct costs appear small, it’s unclear if the living wage is really an effective way to help the working poor. In Calgary the employees most likely to see their wages rise are casual staff in the recreation department: concession attendants, youth leaders and babysitters. These jobs are typically held by summer students unlikely to be their families’ sole breadwinner.

And after a decade of evidence in the U.S., the broader picture is equally unconvincing. While the lucky few receiving a living wage obviously see their incomes rise, this seems to create little in the way of positive knock-on effects. Some studies do show small increases in local wages. Others show small increases in local unemployment. One study found that three-quarters of all recipients of the living wage were not in poverty to begin with. And the poverty rate in Baltimore actually rose between 1990 and 2000.

The living wage appears to be a symbolic, rather than practical, effort at poverty reduction. This may explain why it’s now attracting the attention of rich cities in Canada. They want to appear to be doing something. In Detroit and Baltimore, business communities fought living wage proposals because they were worried it would increase already high unemployment rates and burden business. In booming Calgary, Heather Douglas, president of the Calgary Chamber of Commerce, says she backs a living wage because “it’s the right thing to do.”

It has also been suggested by some American critics that living wage policies are driven by municipal unions eager to make contracting out more expensive. Regardless of its impetus, the prospect of government interference in the labour market via the living wage could create some other unforeseen problems.

Jon Kesselman, professor in the public policy program at Simon Fraser University in Vancouver, notes that a living wage may trap workers in low-skill jobs by discouraging further training or education. It could also lead to favouritism in the awarding of attractive city jobs. And having bureaucrats set wages could lead to a variety of bizarre outcomes. Advocates in Pelham, for instance, propose that the living wage vary with family circumstance. Single mothers would thus earn more than married workers or single individuals doing the same job. “As an economist,” says Kesselman, “I like to see the market setting prices, rather than government.” He argues it’s better to address working poverty through tax credits, wage supplements and other after-market measures. Of course, giving babysitters huge raises probably sounds like a good idea to babysitters.

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