Background: An increasing number of local governments throughout the nation have adopted local laws known as “living wage” ordinances. Typically, these ordinances require employers with some financial relationship with the local government (e.g. a contract) to pay a specified wage rate that is above the federal or state minimum wage.

The movement began in Baltimore in 1994. In Michigan between 15 and 20 local governments, including Detroit and Lansing, have adopted such laws.

According to a 2002 study by the Upjohn Institute for Employment Research, living wage laws are intended to improve the living standards of workers below or near the poverty line. Living wage requirements differ from traditional minimum wage requirements in that living wages are about 60 percent higher than the current federal minimum wage on average and relatively few workers are typically covered. Most living wage laws cover the city’s service contractors. Others cover firms receiving some type of economic development subsidy from the local municipality. About one third cover both contractors and subsidy recipients.

According to the Upjohn study, the prescribed living wage levels in ordinances range from $6-$12 per hour. The median living wage calculated in a 2001 study by Neumark and Adams was $8.19 per hour. Most ordinances set wages higher for employers who do not provide health insurance benefits.

Employee coverage varies. Some ordinances cover only employees directly involved with the city contract or subsidy. Others cover the entire company. Exempt employees may include part-time or temporary employees, employees or those hired through government training, youth employment, or welfare-to-work programs. In some cases the ordinances cover not only the employer directly involved in the contract or subsidy but also the employer’s subcontractors.

Bill Content: The bill amends the Minimum Wage Law of 1964 to prohibit a local unit of government from enacting, maintaining, or enforcing by any method, either directly or indirectly, a minimum wage rate greater than the rate specified in the act. There is clarifying language that the prohibition does not apply to collective bargaining agreements. “Local unit of government” is defined as a city, county, township, village, school district, intermediate school district, or any political subdivision of the state. The Senate committee reported a substitute that contained a provision clarifying that the bill does not prohibit a local unit of government from enacting, maintaining, or enforcing a greater minimum wage rate than prescribed in state law if that rate applies to a procurement contract for goods or services awarded to a private vendor. The bill was also amended on the Senate floor to permit a local unit of government to continue enforcing an ordinance already in effect as to a pre-existing contract. Another floor amendment to address the prevailing wage issue was defeated.

Summary of Arguments

For: According to a 2003 article published by the Cato Institute, the benefits of living wage ordinances are largely an illusion. At best, the article states, such laws generate modest benefits at a higher cost to businesses and taxpayers. Instead of helping low-wage workers by boosting their income, such ordinances have the effect of displacing workers with the lowest levels of skills, experience, and education. Contrary to popular belief, living wage ordinances do little to combat poverty. Many of the projected wage gains go to secondary wage earners in families above the poverty level rather than to low-income heads of households.

Business interests argue that the free market should be the ultimate determining factor in establishing wage levels. Departure from the free market model leads to distortions and inefficiencies. Business is also concerned that living wage ordinances may have a negative impact on the business climate and may impair the ability of communities adopting them to attract new business investment or retain existing business.

The Senate-passed bill does not prohibit most “living wage” ordinances. Its intent is to prohibit city-wide minimum wage requirements that exceed that prescribed in state law. Several cities around the country have adopted such ordinances, and action is needed to prevent such ordinances in Michigan.

Against: Living wage ordinances are a proper response to the economic circumstances affecting low-wage workers. Despite remarkable increases in productivity, wages have not kept pace with the economy, particularly for low-wage workers. The current minimum wage, which was increased to $5.15 per hour in 1996, is 30 percent below 1968 levels in terms of buying power. If the minimum wage had kept pace with productivity gains, it would exceed $11.20 today. The economic reality facing many low-wage workers is that a full-time job earning the minimum wage generates annually earnings that are well short of the poverty line.

Many of the arguments made by opponents of living wage ordinances have not held up under scrutiny. An initial study in Baltimore found that the real cost of city contracts actually decreased after the ordinance went into effect and costs to taxpayers for compliance was minimal. The study also found that the response of the business community to the ordinance was quite favorable, despite the fact that some of the business people interviewed had initially opposed the ordinance. When the results of the first study were questioned, a second study confirmed the findings of the first study. The second study concluded that the living wage ordinance had positive effects on a relatively small number of Baltimore workers without significant financial cost to the City. In addition, the evidence suggested that higher wages improved the stability and reliability of the work force. A Los Angeles study conducted to estimate the impact of a proposed living wage ordinance projected growth in spending, home ownership, and small business markets for at least three areas of the city. The study also found that a living wage ordinance would not increase unemployment among less-skilled workers. According to a 1999 Wayne State study, subsequent experience in Los Angeles appears to have validated the projections in the original study. Upon reviewing the ordinance, the city council found that the outcomes predicted by opponents, including job loss, increased contract bids, and a diminished business climate, had not occurred. The council then proceeded to strengthen the ordinance. Studies in Chicago found that the costs of a proposed ordinance would represent a tiny fraction of the city’s overall budget. The Wayne State study found that costs of a proposed Detroit ordinance would represent less than three-tenths of one percent of the city’s budget. Finally, there is no evidence that living wage ordinances have a negative impact on the business climate. At least six ordinances have been adopted in Washtenaw County, which continues to have one of the strongest local economies in Michigan.

The State of Michigan has a strong home rule tradition in its relations to local government. The proposed bill is contrary to this tradition. Local governments should be allowed to make their own decisions with respect to contracts and economic development incentives without interference from the State.

In addition to prohibiting local minimum wage ordinances, the bill has the potential to override local prevailing wage ordinances. The bill that passed the House in 2000 contained a provision protecting such ordinances. The current bill does not.

Fiscal/Economic Impact

(a) Department

Budgetary: There is no budgetary impact on the department.

Revenue: The bill will have no revenue impact on the department.

Comments:

(b) State

Budgetary: There is no budgetary impact on the state.

Revenue: The bill will have no revenue impact on the state.

Comments:

(c) Local Government

Comments: The bill will have no direct fiscal or economic impact on local governments. However, it could be argued that the bill will spare some Michigan communities from the minor fiscal costs imposed by future living wage ordinance proposals.

Other State Departments: No other state departments are affected by the bill.

Any Other Pertinent Information: Supporters include:

• Michigan Restaurant Association
• Small Business Association of Michigan
• Michigan Manufacturers Association
• Michigan Retailers Association
• Michigan Chamber of Commerce
• Detroit Regional Chamber of Commerce
• Grand Rapids Regional Chamber of Commerce

Opponents include:
• Michigan State AFL-CIO
• Metro Detroit AFL-CIO
• Michigan Townships Association
• Southeast Michigan Jobs for Justice
• International Brotherhood of Electrical Workers (IBEW) Local 58
• Ypsilanti Township
• City of Ann Arbor
• Washtenaw County Administrative Office
• Pittsfield Charter Township
• City of Eastpointe
• Michigan League for Human Services
• Michigan State Building and Construction Traes Council
• Michigan Catholic Conference
• United Auto Workers (UAW)
• Carpenters Local 1004
• Services Employees International Union (SEIU)
• National Lawyers Guild Sugar Law Center

A similar bill passed the House in 2000. A bill was reported by House committee in 2001 but did not pass the House.

Administrative Rules Impact: No new or revised rules will be required if this bill is enacted.