(FORTUNE Small Business) – Call it the Murphy's Law of Economics: If you want to produce less of something--smoking, say, or coal mining--tax it. For a glimpse of the downside of this quick and easy way to influence economic behavior (this is Murphy's law remember), take a drive along City Line Avenue, which divides the city of Philadelphia from the suburb of Bala Cynwyd. Both sides of the street boast tasteful homes, but only the Bala Cynwyd side has thriving businesses as well. Why the disparity? The reason is that Philadelphia has a wage tax of about 4% and Bala Cynwyd does not. Because it taxed jobs, Philly got fewer of them.

That bit of street smarts is worth bearing in mind when considering the fast-growing movement for "living wages." Almost 80 cities have passed living-wage laws since 1994, and today 75 more are considering doing so. Under most such mandates, firms given city contracts or financial assistance must pay their workers enough to support a family of four above the poverty line. In practice, this has meant requiring wages in the $8.50 to $11 range (the federal minimum wage is $5.15). It's the kind of rule--well intentioned but without much reference to reality--that consistently drives business owners up a wall. In Omaha, for example, the city council passed a living-wage ordinance in 2000; it repealed it a year later, in no small part because small businesses never stopped complaining, according to the Omaha Chamber of Commerce.

Despite the Sturm und Drang, most small businesses will never be affected by these laws. That's not a cause for celebration; it's a sign that the laws are flawed. For one thing, they tend to be very narrowly focused; New York City is considering one that would cover just 62,000 people. For another, instead of just paying up, employers will figure out ways to get around it. Perhaps they will employ fewer people--e.g., by replacing them with machines. Or else they'll simply swap those unskilled laborers for more desirable employees. As long as they're paying the higher salary, they may as well hire the best person they can, right?

This isn't just conjecture. A March 2002 study of living wages in 40 cities found that such mandates did raise pay scales and reduce poverty a bit. But it also found a noticeable drop in employment. The author of the report, David Neumark, an economist at Michigan State University, summed up his findings: "Just because something gives poor people more money does not mean it is a good idea." Not to sound Scrooge-like, but living-wage mandates are humbug economics. First, they are arbitrary; low-wage folks in some jobs get a boost while others do not. Second, because benefits like Medicaid and food stamps are reduced as income rises, a raise from $5.15 to $8.50 can result in only a 20% increase in take-home pay. Third, many low-wage earners are not in low-income families--think teenagers and bored retirees.

Neumark's preferred approach is to pass local or state versions of the federal earned income tax credit. The EITC covers all poor families (and only poor families); it does not reduce their eligibility for benefits; and it spreads the costs among all taxpayers instead of piling them onto employers. Sixteen states and two local governments have gone in this direction.

There is absolutely no question that keeping working families out of poverty is a worthy aim. But living-wage ordinances are a particularly awkward--in fact, backward--way of getting there. In real life, Murphy's law says you can't raise the price of labor without seeing some unwanted effects on the job market. And if you still don't believe me, I have a business you might be interested in buying. It's got a great location: right on the Philadelphia side of City Line Avenue.