Impact of the Eugene Living Wage on Disposable Income

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Impact of the Eugene Living Wage on
Disposable Income

• Tatiana Raterman and Mark Allen

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What is a Living Wage?

• A living wage is a policy through which wages are
  increased for certain workers in a city or county
  above the minimum wage.
• It is based on an estimate of what people need to
  support themselves and their families.
• Contains particular guidelines as to who will be
  covered.

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Eugenes Living Wage Proposal

• Proposed by the Eugene Springfield Solidarity
  Network (ESSN)
• Hourly wages of 11.42 with benefits and 14.28
  without benefits.
• Covers all regular and temporary employees
  working over 600 hours per year.
• Covers all contractors with contracts totaling
  more than 10,000 in 12 months.
• Covers financial aid recipients of more than
  25,000 in a 12 month period.

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Literature Review

• Common Concerns of a Living Wage
• Disemployment, crowding out of low-skilled
  workers in the living wage jobs, the ripple
  effect of wages, decreased competition for city
  contracts, and others.
• Adams, Scott, and Neumark, David. The Economic
  Effects of Living Wage Laws a Provisional Review
  . National Bureau of Economic Research,
  Cambridge, MA, June 2004.
• Chouinard, Lauren. Living Wage Analysis. Central
  Services, Human Resource Risk Services, Eugene,
  OR, December 2002.
• What has not been sufficiently discussed how
  well targeted and efficient a living wage is.
• Toikka, Richard, Yelowitz, Aaron, and Neveu,
  Andre. The Poverty Trap and Living Wage Laws.
  Economic Development Quarterly, 19(1), pp. 62-79,
  2005.

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• Our Focus The Effect of Marginal Tax Rates
• The MTR measures the fraction of the living
  wage-induced change in earnings that is kept by
  the household after taxes and benefits are
  considered.
• After wages increase, what portion of
  comprehensive disposable income is kept by the
  family?
• We consider benefits including EITC, WIC, Food
  Stamps, Section 8 Housing Assistance, LIEAP, and
  Oregon Health Plan.
• The Effect of Marginal Tax Rates on the Impact of
  the Living Wage depends on families
  participation in these programs.

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Methodology

• Our analysis is based specifically on Oregon
  data.
• The general idea is to analyze the significance
  of the marginal tax rates of welfare programs for
  the impacts of living wage laws on economic
  well-being of affected families.
• In other words, how much of an increase in
  earnings from a living wage ends up in a familys
  pockets for them to spend.
• First we analyze the living wage impacts on
  economic well-being of 3 representative families
  who participate actively in welfare programs,
  then observe whether our results are confirmed by
  the data analysis.
• Data Analysis
• Draw a sample of individuals in a time series
  using the CPS.
• - Identify who might be affected under each
  proposed living
• wage.
• Construct income tables for households.
• - These will differ in whether or not the
  families
• participate in public transfer and
  tax subsidy programs.

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Data Analysis.. continued

• Assign each family in our sample to a particular
  schedule.
• These associate the change in comprehensive
  disposable income with change in gross earnings.
• Divide our sample into three categories 1)
  single person, childless families 2) Single
  parent families 3) Married couples with or
  without kids.
• In each sub-sample, compute a marginal tax rate
  for each family and calculate a general (an
  average value) MTR for each sub-sample.
• Conduct an analysis of the impact of the MTRs on
  the effectiveness of the proposed living wage
  ordinance in raising the standard of living for
  the affected families.

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Model of Living Wage Impacts on Three Typical
Families

• Family of four with 1 primary earner.
• Income increases from 8.00 per hour to 11.42
  with benefits or 14.28 per hour without
  benefits.
• Comprehensive Disposable Income increases from
  27,927.20 to 28,543.20 with benefits or to
  29,083.20 without benefits.
• They suffer from a 0.91 marginal tax rate. That
  is they lose 91 of their increased gross
  earnings and only retain 9.

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Disposable Income
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Model of Living Wage Impacts on Three Typical
Families

• Single person household
• Expect a relatively large gain from the increased
  wages.
• Comprehensible Disposable Income increases from
  15,119.00 to 19,476.00 with benefits or to
  23,589.00 without benefits.
• They encounter a .36 marginal tax rate for wages
  with benefits and .33 marginal tax rate without
  benefits.

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Disposable Income
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Model of Living Wage Impacts on Three Typical
Families

• A single mother with one child
• Suffered the worst from an increased wage.
• Comprehensible Disposable Income changes from
  24,536 to 24,281.20 with benefits or to
  26,393.00 without benefits.
• This family actually loses income under a living
  wage with benefits since the MTR is 1.04. Without
  benefits, this family encounters a 0.85 MTR.

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Disposable Income
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Results

• The most significant increase occurred for a
  single worker.
• The disposable income of a family of four
  increased with the living wage, but not by a
  significant amount.
• The single parent with a child suffered the
  worst, actually losing money as the wage
  increased to 11.42.
• As participation rates on programs increase,
  families have more to lose as their gross incomes
  increase.

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2003 CPS Data Findings
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Actual MTR Findings Based on the CPS Sub-samples
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Data Conclusions

• For all subsamples the MTRs are relatively high.
• For the subsample of single people, the MTRs are
  the lowest, and between 0.16 and 0.36 meaning
  single people would keep from 64 to 84 of the
  increase in earnings.
• For the subsample of single parents, the MTRs are
  the highest, and between 0.45 and 0.84 meaning
  single parents would only keep from 55 to 16 of
  the increase in earnings.
• For the subsample of married couples, the MTRs
  are high, and between 0.44 and 0.75 meaning
  married couples would only keep from 56 to 25
  of the increase in earnings.
• We can conclude that for the working poor, such a
  large crowding out effect occurs due to
  relatively high participation rates in welfare
  programs (up to 47.12).
• For the relatively rich sample families, such a
  large crowding out effect occurs due to the shift
  to higher tax brackets caused by the living wage
  increase in earnings.
• It is evident that the living wage is an
  inefficient means to raise families disposable
  income due to higher federal and state tax
  brackets and the crowding out of welfare
  benefits.

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Alternatives

• Implementing the living wage may actually be
  pushing costs from the federal government to the
  local community.
• The Earned Income Tax Credit (the EITC) is a
  refundable tax credit that directly lowers the
  taxes a family pays without affecting families
  gross income.
• It more efficiently targets low-income families
  while keeping costs at the federal level.
• Some drawbacks involve participation rates and
  errors, real or fraudulent, in claiming the
  credit.
• Eugene currently does have the state EITC, but it
  is not refundable.

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Conclusion

• Is the living wage worth implementing?
• Implementing the living wage is not the most
  efficient way to raise the standard of living for
  low income families in Eugene.
• Leakages in a form of lost welfare assistance and
  higher taxes. The affected workers are not
  substantially better off with the living wage
  than without (some MTRs are as high as 75 or
  84).
• Labor force participation for low-income families
  that would have a worker covered by the living
  wage is close to only 50.
• Living wage also covers workers that are not
  originally in poverty.
• Living wage ordinances typically only apply to
  city workers, workers of city contractors, and/or
  workers of firms receiving city assistance
• The EITC is more efficient in helping low-income
  workers.
• Unlike the living wage, the EITC can be claimed
  directly by all low-income workers and does not
  increase taxes or lead to loss of public
  assistance programs.
• The EITC is not discriminatory it affects all
  working poor.

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QUESTIONS AND ANSWERS