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A Living Wage for Working Families!

// Jim Anderson - Guest Contributor

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September 6, 2013
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We all enjoyed another Labor Day holiday weekend in which politicians and union leaders of all stripes voiced the traditional platitudes about working families in America. You may be surprised to learn that just because you work and you have a family,you are not necessarily a “working family”.

In the political lexicon a working family is a poor family. The adults are working, often at low-skilled minimum-wage jobs and frequently only part-time. There are assorted government programs that define the “working family” as earning up to some multiple of the poverty line, which is $23,550 for a family of four. To receive food stamps, for example, your income must be less than 130% of the poverty line. Two adults working full-time (fifty-two 40-hour weeks per year) at the federal minimum wage of $7.25 per hour earn $30,160 or slightly less than the $30,615 cut-off for food stamps. The food stamps will bring in an additional $8,016 per year in benefits.  

Sorry about all the arithmetic but there are two interesting points here. First, a 15¢ per hour raise for our sample family means they would be $7,392 poorer (losing the food stamps). Thus they should refuse all pay increases unless it takes both of them above $9.18 per hour. Second, in most parts of the U.S. it is impossible to raise a family and have a decent life at this income level. 

As a result we have the movement for a “living wage”, a term, which dates to the labor battles in England in the 1880s. Generally it means a wage that is “high enough to maintain a decent standard of living” (adequate food, shelter, and other necessities). That obviously varies by location. The living wage in San Francisco for the family above is $52,914 per year requiring a minimum wage of $12.72, well above the local statutory minimum wage of $10.55. To find the living wage in your town check here: http://livingwage.mit.edu

The progressive argument for a “living wage” generally goes something like this: big corporations make lots of money so they can afford it. The counter argument is often that the prices of products would need to be much higher. “Nonsense,” say the progressives, “they can fit it in by giving up some profits and cutting egregious CEO pay.” Recent protests by workers at McDonald’s around the country demanding $15 per hour were fueled in part by a back-of-the-envelope study by ArnobioMorelixat University of Kansas, showing that the price of a Big Mac would need to increase by a mere 68 cents to cover the living wage.

Both the price and the wage argument live in what we call “economic fantasy land” for two reasons 

First, prices in a competitive market are established by supply and demand; Is there any market more competitive than Wendy’s, Burger King and McDonald’s etc.? If the price of a Big Mac is out of line with the competition demand will fall – eventually to zero as consumers flock to Wendy’s et al. Thus, there would be no revenue to pay the $15 per hour living wage.

Second, a company cannot pay wages greater than the marginal value added by the worker. There are a few ways to increase the value of that employee: raise the price of the product, invest in automation to make the worker more productive and teach the worker to do something more valuable.   

Investing in automation, such as touch screen ordering in Europe, is already underway. Such investments create higher value added jobs but fewer jobs than those replaced by the investment. The guy that has learned to repair or program those touch screens probably makes more than the person flipping burgers.  He probably also has more than an eighth grade education.  

In political circles you often hear several standard catch phrases about the economy and the job market. One is “good manufacturing jobs”. This phrase is code for someone standing on an assembly line doing a job not requiring much education making $40 per hour. For about 20 years after WWII those jobs were plentiful mostly because the productive capacity of the planet outside the U.S. and Canada had been destroyed. As the world rebuilt and competition returned, those wages were not viable but unions and foolhardy management were able to lock them in for a few decades. Eventually, foreign competition drove those firms that could not adjust their costs structure out of the market. 

Another common expression is that the “rich are getting richer”. This is true with one caveat. As the accompanying chart from the U.S. Census Bureau* shows it is actually the educated that are getting richer. The chart is indexed to the pay level of a high school graduate. If you have a college degree (about 30% of the adult population) you can expect to earn about 1.8 times the pay of a high school graduate (about 50% of adults). That difference is up from 1.55 times in the 1970s.

Census Chart

Every time Greenspan testified to Congress he was asked about the rising income inequality in the U.S. He always pointed to the very high causal relationship between education and lifetime income.

All this brings us back to the original question about a living wage. High school graduates that are employed in California earn a median wage of $14 per hour. So two fully employed adults could earn about $58,000 per year – a living wage in San Francisco. It is a risky life as unemployment is high and workforce participation is very low in this cohort.  

Therefore, to earn a living wage in a global competitive economic environment you need an education. To have a competitive economy you need an educated workforce and an informed citizenry. The fact that 47 percent of the adults in Detroit are functionally illiterate** may have had as much to do with the city’s collapse as the unions and the failing domestic auto industry. 

These are very simple concepts but ones that, given their dogmatic comments, appear to be poorly understood by our esteemed representatives inside the beltway.

 

*http://www.census.gov/hhes/socdemo/education/data/cps/historical/fig10.jpg
**According to estimates by The National Institute for Literacy

 

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