Living Wage Laws: How Much Do (Can) They Matter?

Harry J. Holzer

Executive Summary

In recent years many municipalities and counties throughout the nation have enacted living wage laws, which require businesses that benefit from government contracts or other forms of public financial assistance to pay wages well above the federal minimum wage, and sometimes benefits, to their workers. Advocates of these laws often view them as ways to raise the earnings of low-wage workers and reduce wage inequality. Opponents often believe that the laws reduce the number of jobs available to low-wage workers and drive businesses away from the jurisdictions that enact them.

This discussion paper describes the living wage laws that currently exist and reviews the academic evidence on their impact. It focuses on the laws’ impacts on labor market outcomes such as wage levels, employment rates, poverty, and inequality. The review’s most important findings for policymakers and practitioners are:

  • Living wage laws affect very few workers directly. Few workers work for firms that are subject to living wage laws. Most studies suggest that the laws cover only 2-3 percent of the bottom tenth of wage-earners. Even in a city of 1 million people, only about 1500 workers are likely to be covered. However, it is possible that the impacts of living wage laws spill over to other workers who do not work for covered employers.
  • Living wage laws have both modest benefits and modest costs for low-wage workers. Living wage laws raise the wages of the lowest-wage workers. They may also result in lower turnover, better worker morale, and modest reductions in poverty. However, they lead to modest reductions in employment for the lowest-wage workers and may also result in reductions in training and in the use of part-time or overtime work.
  • Living wage laws can be useful but meaningful increases in the earnings of low-wage workers and reductions in poverty require more powerful public policies. Because of their limited coverage and modest affects on wages, living wage laws cannot have a large impact on low wages or poverty. Other public policies, such as those to expand collective bargaining, education and training, and publicly financed health insurance and parental leave, are likely to have more impact. Living wage laws can be useful if they raise awareness of pay disparity issues and build support for more powerful policies to raise the earnings of low-wage workers.