Living Wage

What is a living wage?  It is an hourly amount that allows a person to meet a basic standard of living within a community. The President’s goal is to institute a national living wage. However, if you live in Hawaii or New York City a living wage of $10.10 will not suffice.  The CBO report estimates that 900,000 families will be pulled out of poverty and 16 million people’s income will be increased.  Sounds great, however, I do not understand the purpose of a living wage other than an artificial quick fix.  While I understand as a society we want to reduce or eliminate poverty as much as possible, establishing a dollar amount in my opinion does more harm than good and does not address the underlying issue.

Let’s discuss the associated harm that a living wage may cause.

First, is inflation.  As employers are forced to increase employees’ pay rates to the new living wage, the employer will have to also increase pay for other employees that are above the living wage. For example, an employer has two employees.  One is making $9.50 per hour and the other is making $11.00 per hour.  The employer must increase the $9.50 to $10.10 and while the employer is not required to change the rate of the $11.00 employee, the employer will probably be forced to raise their rate as well.  The largest expense of a company is typically wages.  As the employer’s wages increase due to the living wage, associated expenses (i.e. employer taxes, workers compensation, disability, vacation and sick) will also increase since they are based on wages.

Therefore, the employer has 3 options or can institute a combination of the 3 options. Option 1, which is typical, is to raise customer prices. Option 2 is to cut staff or other expenses in order to keep from raising prices. The 3rd option would be for the employer to take a cut in profits. The probable action employers will take is a combination of option 1 and 2.

Raising customer prices will cause those customers expenses to increase along with having to deal with their own internal decisions surrounding the living wage.  The company’s direct wages and associated benefit costs increase due to the living wage.  As other expenses increase as a result of their vendors increasing their prices and passing them along, companies will be forced to cut staff and/or add technology.  Therefore, raising wages will just be passed along increasing prices people pay for everything, thereby causing inflation.  After a couple of years, the living wage will have to be raised again because all prices have increased.  The employee’s living wage is now no longer a living wage and they are back into poverty, if their situation remains the same.

Second, are jobs.  As employers are faced with increasing wage costs, they will be forced to look at alternatives.  These alternatives will be to look at changing processes or by adding technology to replace staff.  Reduction of staff on a national basis, especially to lower wage employees, is counter-productive to the goal of increasing the participation rate of eligible workers.  The CBO report anticipates 500,000 jobs will be eliminated as a result of implementing a living wage of $10.10.

To fix the real problem, governmental policies need to be implemented. There are three underlying issues that need to be corrected. First, is to invest in training and education to give lower income earners the opportunity to obtain the skills and education necessary to earn higher incomes.  Second, bring jobs, especially manufacturing, back to the US.  Finally, third and in my opinion the most important due to the long-term benefits, change our education system to stress creativity and continue to substantially reduce the high school drop-out rate.  Creative people with a vision will drive new industries and technologies that will create new and exciting higher paying jobs for millions of people. That is how you combat poverty, not by instituting a short-term artificial quick fix called a living wage.

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