The Living Wage

Image from ACORN
Compiled by Ryan Voorhees '07 and Shawn Nanan '07

What Is The Living Wage?

Definition of The Living Wage

A living wage can be defined as the wage required to keep a family above the poverty line. The main idea behind the living wage concept is to provide workers with a level of income that would allow for an acceptable standard of living. This would include being able to afford food, healthcare, housing, utilities and some degree of recreation.

While increasing the minimum wage to a level above the poverty line is the driving force behind the living wage philosophy, the movement also is dedicated to maintaining or even improving the wages of all workers, vitalizing the labor movement, and reducing the amount of tax reductions given to business by the government.

How is the minimum wage different from a living wage?

The minimum wage set by the federal government is the minimum amount that employers are allowed to pay their workers (current $5.15), and it applies to almost all workers in the United States. States can also set minimum wages that are higher than the Federal mandate.

In comparison, living wages generally refer to laws set by local governments. These laws cover a specific group of workers, normally government workers or private workers employed as the result of a government contract or subsidy. Normally, Living Wage minimums are significantly higher than both federal and state minimum wages.

Finally, the term Living Wage is used to illustrate the fact that poverty affects many individuals working under the federal and state minimum wage. The term is used to point out that these wages are clearly not high enough to adequately support or raise a family.

History of the Living Wage

The Industrial Revolution

During the Industrial Revolution, workers did not want to live in a wage-labor society. They compared wage labor to slavery. Rather, they were accustomed to a system called independent production in which craftsmen worked for themselves and took apprentices. As a result, during the early nineteenth century, workers hoped to own their own means of production rather than being the paid employees of others. Even workers who felt that wage labor was socially acceptable saw it merely as a temporary step on the road to self-employment.

Critics of the wage system asserted that wages did not provide a 'just return for labor.' They took both producerist and consumerist manners of thinking about labor. The producerist argument believed that the value of what workers created was more than what they earned in wages, and that the remainder was stolen from them. This is akin to the views of Karl Marx. In comparison, consumerists were concerned that wages could be set too low, in a way that would be unable to provide workers with a comfortable lifestyle. Before the Civil War, the producerist argument was supported by the majority of the nation.

Postbellum

Between the Civil War and World War I, businesses rapidly consolidated and were assisted by the government, leaving little alternative to wage labor. Because wage labor was so much more common, workers had much less power to avoid it. Although common citizens realized that there was little alternative to earning a wage, they nonetheless resisted the notion that wages should be fixed and were to be set in stone by employers. By moving from a producerist to a consumerist mentality, workers began to share the belief that wage labor was a liberation from rather than a form of slavery.

Ira Steward – Wage labor societies have no predetermined meaning. People could be either wage slaves or "proud citizen workers earning living wages”.

George Gunton – Wages are simply a part of social progress, not a way for those in power to continue the system of slavery.

Consumerist labor leaders had a common theme in their advocacy of wage labor – the idea that wage earners should be earning what they called ‘A Living Wage'. The debate that had formerly compared wages to slavery was ending, while the comparison of poverty to slavery continued. Although there were a variety of arguments put forth, the general consensus was that wages should be enough to give workers relatively the same standard of living as independent proprietorship did before the Civil War.

Samuel Gompers (AFL president) (1898) – The Living Wage should be enough for a normal sized family to live in a rational manner that is self-respecting and maintains physical and mental health.

The individuals advocating the Living Wage countered the wage-slavery metaphor by equating high wages with freedom, independence, and citizenship.

The Baltimore Experiment

The battle for the living wage has traditionally been fought on the municipal level rather than the state or national level. This is because the monetary and political lobbying businesses can execute carries much less of an advantage on the local, small-scale level. The first victory for the living wage movement occurred in Baltimore in 1994. Starting in 1996, $6.10/hour became the lowest wage firms holding municipal service contracts could pay their workers. The ordinance also specified that the minimum wage would rise to $7.70/hour by 1999, and must afterwards remain consistent in terms of inflation.

Due to the success of the system promoted in Baltimore, multiple other victories were won in the following years. Only three years later, twelve cities including New York, Los Angeles, Boston, Milwaukee, and Portland adopted the living wage system. Current movements include those of Philadelphia and Denver. Although the specifics vary from city to city, the general idea is that private firms wishing to be considered for government contracts must pay their workers more than the national minimum wage.

Why a Living Wage?

Reasons Why

To provide families with an adequate income

According to the Association of Community Organizations for Reform Now (ACORN) "Living wages reward hard work and provide enough income for families to live on."

A living wage ordinance requires employers to pay wages that are above federal or state minimum wage levels. Only a specific set of workers are covered by living wage ordinances, usually workers employed by businesses that have a contract with a city or county government or those who receive economic development subsidies from the locality. The rationale behind the ordinance is that city and county governments should not contract with or subsidize employers who pay poverty-level wages.

To provide well paying jobs

The main reason for enacting a living wage ordinance is to reverse the downward trend in wages for low-wage earners. Wages for the lowest-paid 10% of workers fell 9.3% between 1979 and 1999. The number of jobs in which wages were below what a worker would need to support a family of four above the poverty line also grew between 1979 and 1999. In 1999, 26.8% of the workforce earned poverty-level wages, an increase from 23.7% in 1979.

Living wage ordinances are necessary to prevent city and county governments from encouraging the creation of jobs that pay wages so low that workers live in poverty. Without living wage laws, governments could contribute to the creation of poverty-level jobs by hiring low-paying sub-contractors or giving businesses tax breaks or subsidies to create jobs without any guarantee that the new jobs will pay a decent wage. A study of tax incentives in Minnesota by the Good Jobs First project found that 72% of subsidized jobs paid below the average for their corresponding industry. Living wage ordinances are one tool to ensure that economic development policies create good paying jobs.

Source: Economic Policy Institute

What is the cost of a living wage?

The evidence from living wage evaluations indicates that the costs of living wage ordinances are primarily absorbed by businesses through reduced training and recruitment costs or reduced profits. The evaluations found no evidence of job loss, and the contract costs increased by an insignificant amount.

However, in addition to the cost of wage increases for workers, there are also administrative costs associated with living wage ordinances. One evaluation of the Baltimore living wage ordinance found that that administrative costs amounted to $0.17 per taxpayer per year.

Even if some costs from a living wage ordinance are passed on to the taxpayers, it is a value judgement on the part of the community as to whether reducing poverty through a living wage ordinance is worth the added expense. While the living wage might increase the amount of money the locality spends on contracts, local governments might also experience savings as families become less reliant on income supports and social services.

Source: Economic Policy Institute

Critics believe that Living Wage laws create out-of-market wages, sometimes for less-skilled workers. In return this also raises the amount that highly skilled workers expect to earn. Contractors need to make up for these costs somehow either by laying people off or kicking back the costs to the government and/or consumers. In some cases the wage increases can be simply absorbed by the company, but that is not always the case.

Many economists that are in opposition of a Living Wage ordinance argue that the cost of a living wage will be higher unemployment. They believe, as stated above, that in order to maintain profits, companies must find other ways to absorb the cost of the higher wages that they now must pay. They do so by reducing benefits, increasing unemployment and sometimes by raising prices - which ends up harming the consumer.

Issues

The following are some of the key arguments that economists make both for and against the Living Wage.

Poverty

Municipal governments have at their disposal a variety of initiatives that address poverty. However, by contracting out government work to private companies who pay their workers cheaper wages, they can actually create poverty level jobs. Living Wage ordinaces intend to lessen or stop this from happening, because they would make it illegal to subcontract government work if workers are paid less than they would be paid by the government.

Although minimum wages are going to the right people, inflation will cause real wages to inevitably continue decrease over time. This limits the effectiveness of minimum wages as an antipoverty policy tool. For example, even after the 1996/1997 minimum wage increase, the minimum wage provides a full-time worker with 19% less income than what they need to maintain a family of three at the poverty line and 37% less for a family of four.

Empirical Evidence

- In general, minimum wage laws are effective at targeting their intended recipients. Bernstein's 1996/1997 study on the minimum wage increase from $4.25-$5.15:

- 10 million workers affected

- 58% female

- 71% adult

- 46% full time workers

- 57% of the gains distributed to the poorest 40% of working families

Figure 2.1 shows the declining value of real wages from 1960 to 1997.

Figure 2.2 shows that although the federal minimum wage used to be enough to support a three person family, it is no longer enough to sustain a household above the poverty line.

Employment

Argument Against Living Wage

Although it is clear that the minimum wage does not eliminate poverty, most critics focus on the employment issues that government-established wage regulations may cause. Standard neoclassical economics makes the argument that wage increases would increase unemployment and actually end up hurting their intended beneficiaries. They believe that wage regulations would unintentionally price low-skilled workers in low-paying jobs out of the labor market, and destroy their own job opportunities. A noteworthy advocate of this hypothesis is Paul Krugman.

This graph shows that minimum wage laws artificially set wages at above-equilibrium levels. The supply of labor will be greater than the demand for labor, and create labor market failure (involuntary unemployment).

This graph further emphasizes the idea that wage laws create disequilibrium. Living Wage critics believe that because the Living Wage is higher than the minimum wage, these laws will necessarily create a worse disequilibrium than that created by minimum wage laws.

Argument For The Living Wage

Macroeconomic Scale

Figures 2.2 shows that that changes in the minimum wage are not correlated with changes in the aggregate unemployment of the entire United States economy. Figure 2.3 makes the same conclusion for teenage employment, a demographic of individuals who tend to receive minimum wages.

While, the scatter plot relates higher minimum wages with slightly less unemployment, most economists give three reasons why it is not enough to be definitive.

- The economy is not ceteris paribus over many decades. Other variables change besides wages.

- The data has significant spread.

- The correlation does not imply that either factor caused the other factor to change.

Microeconomic Scale

A 1994 study by Card and Krueger used data more relevant than large aggregates, which Living Wage critics believe to be negligable to the actual debate. They took two rounds of data from fast food employees working in New Jersey and Pennyslvania. The first data was taken before New Jersey increased its minimum wage, the second round was taken afterwards. As a result, the Pennsylvanian workers acted as the control group and the New Jersey workers were the experimental group.

Card and Krueger chose the fast food industry because it is one of low-wage, low-skilled workers who are greatly affected by changes in the minimum wage. They determined the specific geographical location for three reasons:

- A stagnant labor market meant that the unemployment figures would not be corrupted by a quickly growing economy.

- The economies of New Jersey and Pennsylvania are geographically close to each other, and similar as well.

- Politically, the probability of employers being prepared for the wage increase ahead of time was low.

After comparing the change in New Jersey and Pennyslvania's employment, Card and Krueger concluded that the minimum wage increase had no measurable impact on employment in New Jersey as it compared to Pennsylvania. The defense proposed by the study's critics is that the data was flawed because it was taken over the phone rather than by obtaining payroll certificates directly from employers.

Productivity

http://page.mi.fu-berlin.de/~prechelt/Cartoon/productivity_rises.gif from page.mi.fu-berlin.de

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	Figure 1.1 shows a steady decline in the value of real wages Graph source: Pollin and Luce
	Figure 2.4 is comparing the value of the minimum wages in 1968 and 1997. The third bar represents what the minimum wage should be in 1997 if there was an increase in minimum wages that correlated with an increase in productivity growth. Graph source: The Living Wage: Building a Fair Economy by Pollin & Luce

As Figure 1.1 (Real Wages) shows, there has been a steady decline in the value of real wages in the United States since its peak in 1968 ($7.37). This is happening co-currently with increased productivity and production. As Figure 2.4 shows, if workers were receiving "their share of the pie," then an increase in their wages should correlate with an increase in productivity. However, the value of real wages have decreased 30 percent since 1968, leaving a family of three working full time below the poverty limit (at the current minimum wage rate).

Wages are recognized as a cost to firms, therefore higher wages for workers means that firms are lowering their profits by increasing the total cost of production. Samuel Bowles recognizes lowered profits as a downside to promoting a living wage ordinance, but he also believes that the increase in worker productivity can increase to offset the cost increase. He says “Paying a person more costs you more, but it buys you a different attitude and a stronger commitment to the firm” which can do nothing but benefit the firm in the end.

According to the efficiency of wage model, an increase in worker productivity (intensity of labor) is among several factors that can result in an increase in output. Increased output per hour in turn increases the total revenue (TR = P*Q) which offsets the increase in pay that the workers have received. In fact, even if the unit cost of production increases because of an increase in worker pay, the firm can still return a larger profit if the number of units produced per hour multiplied by its price is greater than the unit cost of production.

Privatization

Living Wages & Capital Flight

Since living wage ordinances are usually directed at public jobs (local/state/federal), some economists have begun to argue that these jobs can now be contracted out to private firms who are under no obligation to pay their workers the living wage mandate that the public sector has passed.

Robert Pollin and Stephanie Luce use the Baltimore case study (one of the first living wage cities) to debunk this assertion. The data that they presented show that although in a few cases this is evident, overall the city contracting bids post-living wage have not had any significant changes. The figure below shows just that.

	The data to the left show the number of contract bids before and after the living wage ordinance was passed.
	This refutes the assertion that living wages would result in the government contracting the work to private firms. Source: Pollin & Luce

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It is important to note that the relationship between private contractors and local government is such: As provisioned by the living wage act, in order for a private company to be contracted for use by local government, the private company MUST agree to pay its workers at least the amount indicated by the living wage ordinance for that city.

This provision ensures that the government would not be better off if they contracted out all the work to private firms: they would not be paying less... in fact, they may end up paying more.

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Some living wage detractors argue that the living wage will create a "hostile business climate." But most living wage ordinances cover too small a portion of the labor force to have such a profound effect; most living wage ordinances cover less than 1% of the local workforce. Wages are only one factor in a business' decision to move to a location, and there is no evidence that an existing living wage ordinance has discouraged firms from locating in a city.

In addition, the costs of the living wage ordinance will have a very small impact on the profits of the small number of firms affected by the law. The profit margins for firms effected by the living wage are estimated to range from 10-20% of production costs. In comparison, the wage increases from living wage ordinances are estimated to be 2% of production costs.

Source: Economic Policy Institute

The Living Wage & the Global Economy

http://www.barryscartoons.com/Images102003/OUTSOURCING.jpg
from www.barryscartoons.com

Developing Countries and the Living Wage

In his letter to a Columbia University Committee concerning The Living Wage, Jagdish Bhagwati explains that it will not help the working or living conditions of Indian employees:

"Instead of the Living Wage as part of the Social Responsibility definition, I therefore prefer that one focuses instead on matters such as the following:

• minimum safety standards
• dignified treatment of workers
• reasonable restrictions on working hours and rights of women workers..."

In his work entitled What It Will Take to Get Developing Countries into a New Round of Multilateral Trade Negotiations, he says:

"However, pushing for 'living wages' is not a good way to go – this benefits those already with jobs in the developing countries, not those on the outside looking in."

Our Conclusions

Low and High Skilled Workers

In the absence of living and minimum wage laws, firms can choose either the "low road" (low pay, low training, low motivation, high turnover, and high vacancies) or the "high road" (higher pay, more training, greater motivation, lower turnover, and fewer vacancies). Almost every industry includes profitable businesses that follow both paths.

High-road employers, who would rather have a stable workforce and produce a high-quality product, have to compete for contracts with low-road employers, who provide a poorer-quality product at a lower cost. Living wage ordinances encourage businesses to take the high road, leading to higher quality services for the public and a more highly trained workforce.

Source: Economic Policy Institute

The empirical evidence relating to poverty, employment, productivity, and job privatization stacks up in favor of the Living Wage. We feel that the positive effects of the Living Wage (increased standard of living for those affected, increased productivity from happier workers, no increase in unemployment) clearly outweigh the negative suppositions (increased taxes, cost of production, increased unemployment).

Living Wage Success

The graph to the left shows the total number of cities nationwide (USA) that have adopted living wage ordinances since 1994. The data was collected from ACORN. It is important to note that of all 130 living wage ordinances, only 6 cities have repealed the ordinance. These are: Omaha, NE; Hazel Park, MI; Hempstead, NY; Monroe County, MI; Pittsburgh, PA; and Santa Monica, CA.

Based on the graph above, one can easily deduce that more and more cities are joining the living wage campaign. In today's labor market where the income inequality gap is increasing considerably every year, the necessary steps must be taken to ensure that people are receiving "their share of the pie" and are able to maintain a decent standard of living. The United States reports the world's largets Gross Domestic Product, yet there is extensive imbalance when it comes to its distribution.

In an economy where C.E.O. salaries are 400 times that of the average worker, it is highly questionable whether or not it is acceptable for so many Americans to be living close to or beneath the poverty line.

The minimum wage should be one which is able to sustain a family given full-time employment. Should they suffer because they fall into the category of low-skilled labor? Or do they at least deserve some decent standard of living? A national living wage ordinance would serve to redistribute some of that wealth to those who need it the most.

Sources

Robert Pollin and Stephanie Luce, The Living Wage: Building A Fair Economy

Lawrence B. Glickman, A Living Wage: American Workers and the Making of Consumer Society

Jeff Chapman's Employment and the Minimum Wage

EPI's Living Wage Issue Guide

ACORN

Paul Krugman's Unofficial Page

Wikipedia