Living Wage in the US
A Brief Introduction
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
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 Washington and is set at $7.63 per hour.
What is a Living Wage?
A living wage is a wage higher than the state or federal minimum wage. It is locally enacted either though a state or local government, or may be enacted throughout a corporation. A living wage may be designed to keep a family of four above the poverty line or may include covering certain benefits such as health care. Theoretically speaking, a family affected by the minimum wage should no longer have to rely on welfare or food stamps to sustain the their needs.
In 1994 the Maryland senate voted on a statewide living wage, but the governor vetoed the bill. The city of Baltimore passed the first living wage bill in the United States. Their living wage is currently set at $9.06 per hour. Since the passing of Baltimore's living wage ordinance, more than fifty three others have been passed across the nation.
Why Do We Need It?
1. The minimum wage is not sufficient to keep working families above the poverty line. The period we are in now is the longest that congress has not raised the minimum wage due to inflation. The poverty line that the government uses today was developed in 1963 and was determined by assuming that households use one third of their income for the cheapest food that could provide the necessary calories to survive. This number was multiplied by three to generate the poverty threshold, but there are problems with this method. While the poverty threshold has been recalculated to take into account inflation, certain necessities have risen much faster in price compared the number that the Consumer Price Index uses. These necessities include heatlh care, transportation and housing. Because these prices have risen disproportianately to food prices, the actual poverty threshold is much higher than many people think. The minimum wage does not provide enough income to keep families at the current poverty threshold, let alone the poverty threshold which takes into account other basic necessities.
- Based on estimates by researchers, in Santa Fe, New Mexico, the average cost of raising two children with two parents cost at least an estimated $45,000. Assuming that the parents are two low wage workers earning about $7.75 per hour, working 40 hours a week, they would only make $31,000 before taxes. This income is not even three quarters of the income needed to have a decent standard income.
2.It is the view of many people that it is immoral for low wage workers to be working full time and still not make enough to keep themselves above the poverty line. In the mid 1930's, Franklin D. Roosevelt was quoted as saying, "no business which depends for existence on paying less than living wages to its workers has any right to exisit in this country."
3. Without a living wage, low wage workers must depend on welfare and food stamps for support. It should not be the taxpayers responsibility to support these people, but the companies that employ them.
4.The cost of living varies drastically from city to city. In Pierre, South Dakota, the cost of living is 59.4% lower than the cost of living in Reston Virginia. This means that in Reston Virginia, $20,000 has the purchasing power that $8,113 dollars has in Pierre.
- The cost of living in Harrisburg, PA is 31.65 lower than the cost of living in Santa Fe, NM. $20,000 dollars in Santa Fe has the purchasing power of $12,773 in Harrisburg.
- If you live in Morristown NJ and make $20,000 per year, you will only need to make $16,641.60 in Phoenix, AZ to maintain the same standard of living.
- These examples prove that it is much more efficient to create a living wage for certain cities or geographic regions than to try to raise the minimum wage. A living wage is flexible and can be designed to ensure that employees receive certain benefits or that they make enough to cover certain needs such as medical expenses that the minimum wage wouldnt cover.
==Debating the Issues ==
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.
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.
=== 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)
- 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.
- 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.
- 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.
The Living Wage in Action
=== 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.
- 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. [1]
- On Earnings and Social Assistance Programs: The total earnings data was collected by the New Mexico Department of Labor for employees covered by unemployment insurance. And the data proved that minimum wage did not have any adverse effect on earnings of workers. In fact, there was considerable improvement for average wages. The grand total of average weekly wages for every quarter after the LWO has been higher than that of before the LWO. The lowest grand total after LWO occured in Quarter 1 of 2005 is $594 million, but the highest grand total before LWO is only $602 million. All other quarters from Jan 2004 have the grand total well above $603 million. Furthermore, the population relied on social assistance programs has been reduced faster or grown more slowly in Santa Fe county compared to New Mexico State as a whole. [2]
- On Gross Receipts Tax Revenues: The gross receipts tax revenue distributions in Santa Fe have had a fall-off after LWO. Yet, that does not seem to be related to any economic effect of the $8.50 minimum wage. The reasons behind this are the unexplained fluctuations from one month to another of the tax distributions, which did happen before LWO in Santa Fe. [3]
- On Cost of Living: Between June 2003 and November 2005, the cost of living in Santa Fe increased 9% on a 12 month average basis. This increase was significant comparing to the national average. The increased cost was mostly the result of the increase in gasoline and housing (16.8% and 18.1% respectively). However, comparisions with national averages are not reliable because of the differences in methodologies, particularly in term of the basket of goods in the indices. [4]
- On Businesses: As in findings conducted by University of Mexico, businesses reported having a good year, though they feel that revenue did not increase proportionally to costs. Another significance is the reduction of health benefits for workers since the health benefit package costs have been increasing 18% to 20% per year. [5]
