Living Wage in the US

In Support of a Living Wage

Dan Polli, Sophomore, Dickinson College, IB&M and Spanish major
Duy Phan, Sophomore, Dickinson College, Economics and Mathematics major
Halina Terajewicz, Sophomore, Dickinson College, East Asian Studies major and Chinese minor

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Description

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What is a Minimum Wage?

A mimumum wage is the lowest hourly wage a worker can be paid as mandated the federal or state government. The federal minimum wage in the United States was created in 1938 and was set at $0.25 per hour. Congress has periodically voted to increase the mimimum wage because of inflation. Today the federal minimum wage is $5.15 per hour. During President Clinton's administration, it was decided that states should be able to create their own minimum wages, as long as they are greater than the federal minimum wage. The highest state minimum wage today is in Oregon and is set at $7.40 per hour.

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The Benefits of a Living Wage

• Assists in greater support of family for low income workers

The reason why a living wage is so powerful is because of the fact it can be implemented on a local basis. The labor market and price levels vary widely in the United States, but the ability to adapt a wage to a specific area can have powerful effects on the low income workers of the municipality.

• Lower turnover

An increase in the wage of almost any employee will surely brighten their outlook of the job at hand, as well as the future. With an increase in the wage, businesses are likely to encourage workers to stay with them. A happy work force could have a dramtically positive effect on the firm and market.

• Promote worker loyalty, pride in work and self

The raising of a firm's minimum wage should allow employees to realize that their business is behind them. This form of encouragement will make them proud to work for the firm and hopefully increase the likelyhood of the pride in how the complete their tasks.

• Increase productivity

Perhaps the biggest benefit to increasing the wage of workers is the productivity increase it potentially could create. The increased wages can create a desire to please the firm among employees. A productivity increase is central to the argument of a living wage, and it proves many common misconceptions about higher cost wrong. This wil be discussed in the section about disproving the negtive sides of a a living wage.

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Possible Negatives of the Living Wage

• Unemployment

Economics 101 teaches us that an increase in wages would cause a decrease in demand for labor. Therefore, a decrease in employment is inevitable. Firms would find it less worthwhile to hire low end workers by a wage higher than the marketplace and they would cut jobs instead or outsource the jobs, mostly in manufacture, to developing countries.

• Purchasing power

Since the cost of labor increases, the cost of production would increase. That means the price of products in general would increase as well, leading to a higher cost of living. As cost of living increases, the purchasing power of minimum wage would go down. Therefore, minimum wage workers would be in no better shape. This argument, again, is based on Econs 101.

• Labor Subtitution

This is an unintended consequence of the living wage. The argument is unskilled workers will lose out not because their jobs would vanish but because better skilled workers would replace them. Unskilled workers earn low wages as firms regard them only worth the wages. Once higher wages must be implemented, firms would seek out for more skilled workers, who worth the money they pay.

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=== Higher Costs, and How It Can Be Solved ===

• As mentioned, the biggest criticism that oppenents attack about the living wage are the costs created by it. The fundamental principle behind there argument is quite basic, higher wage- higher labor costs. Opponents state that these higher labor costs would most likely cause firms to cut jobs and under the most extreme conditions, relocate. However, they fail to consider the other options for how the higher labor costs can be passed on through firms. Dr. Robert Pollin, Professor of economics at the University of Massachusetts-Amherst, proposes three different ways to assist firms in coping with higher labor costs: Raising prices, improving productivity, and redistributing income. (CITE)
  1. Raising Prices: Essentially, if firms were able to raise there prices high enough to cover the entire increase of in labor costs, there would be no need to change any other facet of their business. The type of business the wage is raised in will have a difference in the price change. For businesses that contain a higher percentage of lower income workers, the increase will be greater. For example, Pollin suggests that restaurants and hotels would be the most affected. Basesd on his research, their prices would rise an estimated 5-6%(CITE). However, when one really considers and examines these price increases it is minimal.
  2. Improving Productivity: The second method that Pollin forsees is the increase in productivity of a firm from higher wages. This suggestion is not so much a policy as it is an effect from the increase in the wage. An incresed efficiency in production would be a result of higher morale in the workforce of the firm, limiting the turnover rate and the need to encourage and supervise workers. With these factors in mind, the degree to which efficiency is increased will affect the profits of the firm. This could potentially cover or at least partially counteract the rise in labor costs.
  3. Income redistribution: In Pollin's testimony to the Santa Fe Living Wage council he states that as of 2001, a CEO in the United States earned at least 400 times that of his average employee (CITE). Although this figure might not apply to all businesses, it is an example of how ill structured our income distribution is in the United States. Many people see this option and have the impression that others salaries must be cut in order for this to be effective, but this is not the case. What Polin suggests is that instead of executives wages growing at such an astounding rate, that they curb their growth to a few percentage per year. This argument makes sense, considering that even a slight percent of these enormous incomes, is a great amount of money to the average employee.

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=== Santa Fe, an Example ===

• Background

Santa Fe, the capital of New Mexico, has a population of 62,543. In the fall of 2001, the first Living Wage Ordinance was proposed that would apply to city employees, city contractors, and to the private sector in general. The Ordinance want into effect on January 1, 2004, and it covers 60% of Santa Fe employees. The minimum wage was then raised to $8.50, and finally to $10.50 per hour in 4 years.

• The Effects

The living Wage in fact does not have any negative impact on Santa Fe's economy as in theory.

1. On Employment: Based on data collected in Santa Fe before and after the Living Wage Ordinance (LWO)(up to June 2005), it showed that employment was not decreased but increased instead. For businesses with 25 employees or more, the average employment raised from 66.3 to 67.5 after the LWO. Similarly, the average employment for businesses with less than 25 employees is the same as before LWO. The total employment did raise from 18726 to 18894. On the other hand, looking at all industries in Santa Fe, almost none significantly reduced their level of employment. The exception is construction industry, with 6.9% decrease. More information regarding employment of Santa Fe after LWO can be found at ... (outside source).