The seemingly unstoppable force of the "living wage" movement rolled into Montgomery County, Maryland this month, and for once met it's match: a New Democrat counterproposal to "make work pay" for low-income families. County Executive Doug Duncan proved there is a Third Way for lifting working families out of poverty, beyond conservative injunctions to let the working poor fend for themselves, and liberal demands that wages be doubled by government fiat.

New Democrats have always believed that families who work hard and play by the rules should not have to live in poverty. The very first proposal made by the Progressive Policy Institute (PPI) back in 1989 was for a major increase in the federal Earned Income Tax Credit (EITC), a refundable tax credit supplementing wage income for the working poor (i.e., if you don't have any tax liability, you get a payment up to the amount of the credit).

A boost in the EITC represented one of President Clinton's first policy accomplishments, which made work-based welfare reform possible. We believe--and polls show the public agrees--that the implicit social compact made by the nation in enacting time-limited welfare reform was that work should pay more than public assistance. In fact, private-sector work won't "work" at all for low- income families if they do not have access to the child care, job readiness skills, and transportation necessary to move off of welfare.

The Left's "solution" to the challenge of making work pay is the living wage movement. This movement has produced great excitement and some political success among old-style grassroots liberals who are otherwise having a pretty bad decade. Living wage proposals have been adopted in 28 cities and 7 counties--most recently in Los Angeles County, California.

The precise objective of living wage campaigns varies from place to place. It usually involves passing local ordinances that require companies doing business with or receiving other benefits from local governments to pay a minimum wage roughly double the national level. Like minimum wage increases generally, the idea is politically attractive because it does not appear to directly cost taxpayers anything.

The problem with living wage initiatives is that they don't make economic sense. They are poorly targeted because they focus on per-hour wages, not total income. Many second- or third-earners, students, and part-time workers from middle- and upper-income families get an unnecessary boost.

More importantly, the intended beneficiaries of the living wage often wind up paying for it, along with taxpayers. Executives for companies suddenly experiencing higher labor costs do not go back into a counting house and rake off some of their profits to share with poor workers. Instead, they pass along the costs in higher prices. In the case of vendors providing local services, this means taxpayers pick up the tab just as they would with direct expenditures. Worse yet, some employers will get by with fewer low-wage jobs, or will contract out for temporary workers. Others may simply boogie off to non-living wage locales, defeating the whole purpose of the initiative and eroding the tax base as well. Finally, doubling wages will attract new workers for existing jobs, potentially displacing the very people the initiative claims to help.

For all its shortcomings, the living wage movement has been successful in city after city--until it reached Montgomery County.

Faced with strong grass-roots efforts, local and national publicity, and what appeared to be a solid majority on the County Council, Duncan countered with a comprehensive package to make work pay the Third Way. It included:

• the nation's first county-level refundable Earned Income Tax Credit, matching Maryland's state- level EITC
• full funding to eliminate the current waiting list for Montgomery County's public-private program of child care services for low-income working parents
• an intensified effort to supply health care for uninsured workers
• a new push for affordable rental housing for the working poor;
• a package of job readiness and skills training initiatives, including a Career Advancement Center, technology training funds for underskilled workers, and a Skills Alliance encouraging on-the-job skills upgrades by employers
• expansion of the County's already extensive public transportation system with new routes tailored to the work places and work times of low-income families

It appears Duncan's initiative will be accepted in lieu of a living wage proposal by the County Council, for the simple reason that it better targets resources to working poor families without the many perverse results and economic risks associated with mandating a doubling of wages. Furthermore, it will help all of the county's working poor, not just those working for companies doing business with the county government.

Duncan provides a template for how New Democrats should respond to the continuing need to make work pay and well-meaning efforts on the Left that unsuccessfully seek to repeal the laws of economics. Not all cities or counties have an income tax that can make a local EITC possible (32 of the 42 states with an income tax have yet to establish a state-level EITC). However, Montgomery County's other "make work pay" provisions can be applied almost everywhere: indeed, they can be done with the flexible welfare block grant funds states receive under the 1996 welfare reform legislation. Best of all, they can work.