Minimum Wage as a Living Wage

Last month we touched on the subject of living wages as a remedy for the unjust income disparities that exist in American society. [1] Subsequently, almost as if on cue, President Obama suggested raising the minimum wage to $9.00 per hour in his State of the Union speech. [2]

Now it must be readily admitted that no actual prescience was involved here, and there is a high level of confidence in surmising that the president does not read Christian Democracy. But it seems that the minimum wage will be a topic of discussion in the near future, the likes of the Nobel Prize winning economist Paul Krugman having recently weighed in on the issue. [3]Of course, that doesn’t mean that legislation raising the minimum wage has a snowball’s chance in the infernal regions of getting through Congress, but the subject is being discussed publicly, if only for the moment.

There is opposition to the idea, naturally. It is said that raising the minimum wage will increase unemployment. [4] Assuming some validity to that point, the question arises as to how low wages should be allowed to go. If raising the minimum wage increases unemployment, then lowering the minimum wage should decrease it, and abolishing the minimum wage entirely should decrease unemployment all the more. But it seems clear that reducing or abolishing the minimum wage would have some fairly unpleasant results.

The current federal minimum wage is $7.25 per hour. [5] Assuming a 40 hour work week for 50 weeks per year, that amounts to a yearly wage of $14,500.00. According to the Poverty Guidelines promulgated by the U.S. Department of Health and Human Services (HHS) for the 48 contiguous states [6], that amount is insufficient to keep a family consisting of two people above, or even at, the poverty line. Obviously, lowering or abolishing the minimum wage would exacerbate that situation.

Few would find it conscionable to pay workers in the United States $1.00 per day, even if it meant that the country could approach full employment. At the same time, not many would be in favor of raising the minimum wage to $100.00 per hour. Common sense seems to tell us that there is a point where wages become too low to be acceptable, and there also seems to be a wage level that would amount to an excessive requirement on employers according to that same common sense. Finding the appropriate level is the challenge, given competing considerations.

According to the 2010 census, the average household size in the United States is 2.59 people. [7] The HHS Poverty Guidelines set the poverty line at $11,490.00 per year for one person, and add $4,020.00 for each additional person in the household. That would set the poverty line for the average 2.59 person household at $17,881.80 per year. To reach that amount, assuming 50 weeks of annual work of 40 hours each, the hourly wage would have to be $8.94 per hour (higher for Alaska and Hawaii). The $9.00 per hour proposed by the president would bring our hypothetical average household to $18,000.00 per year, just $118.20 per year above the poverty line. One would have to be far gone in the way of a certain ideology to be opposed to that, especially considering the fact that no actual households have 59% of a person residing in them.

To oppose raising the minimum wage to that level is to, quite simply, support the allowance of paying poverty wages. Regardless of the sophistry one might employ, any argument that sub-poverty wages should be permitted cannot be squared with Catholic social teaching which holds that a “just wage is the legitimate fruit of work,” that to “refuse or withhold it can be a grave injustice,” and that in order for a wage to be just it “‘should guarantee man the opportunity to provide a dignified livelihood for himself and his family on the material, social, cultural and spiritual level, taking into account the role and the productivity of each, the state of the business, and the common good.’” [8]

But there is more to consider. Children should be important, although it is to be admitted that the Culture of Death has diminished their perceived value. Still, our society has not yet countenanced the killing of children already born, and recognition should be given to the reality that children depend upon their parents for their sustenance. In this connection, then, the average number of people per U.S. family household with their own children under 18 ought to be considered.

The average household with minor children in the U.S. consists of 3.92 people. [9] Again utilizing the HHS Poverty Guidelines, to bring such a hypothetical family right to the poverty line, the wage would be set at $23,228.40 per year, or $11.61 per hour. With this consideration in mind, it would be appropriate for the minimum wage to be set at $12.00 per hour, or $24,000.00 per year, which would put our hypothetical family at $771.60 per year over the poverty line. Thus, although the president has proposed raising the minimum wage by $1.75 per hour, it appears that, when families are considered, his proposal is $3.00 per hour short.

It should not be considered a radical idea that the minimum wage should be sufficient for the average family to stay out of poverty. The alternatives are not conducive to a healthy society. If a person works but still cannot support his family on his earnings, then welfare in some form has to be utilized in order for the family to survive. To bring the average family with minor children up to the poverty line where the sole breadwinner makes the current minimum wage, the government must provide $8,728.40 per year to that family out of the public treasury. This scenario is not fanciful. There are plenty of single mothers in our society to whom the fathers provide no support. What happens in such instances is that the taxpayers are providing a subsidy to the employers of such people. Whatever one thinks of subsidies to businesses generally, it seems to be a poor policy choice to provide them automatically to the businesses that pay the lowest wages.

Those who have sufficiently immunized themselves against concern for human suffering will offer that an argument has been provided here against any sort of welfare program at all. But the expectation that people will passively accept starvation or homelessness, even when they are productively employed, is a fond one. If people cannot support themselves by legitimate means, even the more conscientious will turn to crime to make up the difference, especially if they have children to be concerned about. One can confidently submit that no one has suggested that American society suffers from too little crime.

When it comes to the question of how raising the minimum wage will affect unemployment, it has already been pointed out that, even if the notion of a direct correlation is granted, the idea that a wage can be unconscionable does not disappear, and the hard work of determining what the lowest fair wage is must be engaged in. But it is not at all clear that the minimum wage has the direct impact on unemployment that one might intuitively suppose. The fact is, economists are divided on the issue [10], and studies have been done that have found no evidence that minimum wages adversely impact unemployment.

In March of 2000 the National Economic Council (NEC) created a written report with the assistance of the Council of Economic Advisers and the Office of the Chief Economist of the U.S. Department of Labor. [11] Regarding the impact of minimum wages on unemployment the report had this to say:

“Since the minimum wage increase in 1996, the economy has created more than 10 million jobs and the unemployment rate has fallen from 5.2 percent in September 1996 to 4.1 percent in February 2000, near its lowest level in thirty years. Labor market trends for workers most affected by the minimum wage increase—including younger workers, workers with lower educational levels, and minorities—also show no negative impact of the minimum wage on employment. Numerous careful economic studies, including ones by David Card and Alan Krueger, have shown that increasing the minimum wage has no negative effect on employment. Recent research has even suggested that higher wages can increase employment, because they increase employers’ ability to attract, retain, and motivate workers. And they benefit workers by increasing the reward to work.” 

In March of 2006, the Fiscal Policy Institute (FPI) had this to say about the relationship between minimum wages and unemployment:

“The simplistic introductory economics prediction that an increase in the minimum wage will result in job loss clearly is not supported by the actual job growth record. Rather, faced with an increase in the minimum wage, small businesses may have benefited from some combination of higher productivity through improved worker retention and savings on recruitment and training. There may also be a “Henry Ford” effect at work: if you pay workers more, they can buy more, boosting the overall economy, especially among small retail businesses.” [12]

The FPI did a comparison for the period from 1998 to 2003 between states that had a minimum wage above the required level and those that did not. The results were startling. It found that the “number of small businesses across the economy with fewer than 50 employees grew by 5.4% from 1998 to 2003 in the higher minimum wage states, compared to a 4.2% increase for the balance of the states…” and that in “the higher minimum wage states as a group, small businesses had faster job growth (6.7% vs. 5.3% for the other 40 states combined); total annual payroll grew more (24.5% vs. 21.2%); and average payroll per worker increased by 16.7%, a greater increase than the 15.1% increase for the 40 states observing the federal minimum wage.”

The FPI study also looked specifically at the retail industry. It found that the “number of small retail businesses grew by 0.6% in the higher minimum wage states (compared to a 0.3% decline for all other states), the number of employees increased by 4.1% (versus 2.6%), total annual payroll increased by 19.7% in the higher minimum wage states, and average payroll per worker increased by 15.0% (versus 16.9% and 13.9%, respectively, for the other states).”

Job growth was also examined in the study. It was found that total “employment in the higher minimum wage states increased by 9.7% from January 1998 to January 2006, 30% greater than the combined job growth of 7.5% for the other states where the federal minimum wage prevailed…” and that retail “employment grew by 10.2% in the minimum wage states over this 8-year period, nearly triple the 3.7% retail job growth in the other states.”

Results of this kind would be impossible if there was the direct relation between minimum wages and unemployment that many suppose there to be. Even if there are studies that show instances of a correlation between a rise in the minimum wage and a rise in unemployment, correlation does not imply causation, and a causal relationship between raising the minimum wage and an increase in unemployment would make results discovered in the FPI study difficult to come by.

While the maxim that correlation does not imply causation applies to the NEC and FPI studies as well, we can legitimately surmise why such positive outcomes can be obtained when minimum wages are raised. First, there is an increase in the incentive to work. Where, as in the present circumstances of our nation, work will not provide an actual economic benefit over welfare, inducements to perform the types of work that tend to pay minimum wages will be sparse. Conversely, if wages are set at a level such that the disincentive is removed, the search for work will become more avid, with a resulting benefit to the public treasury.

We can also have recourse to the truism that businesses prosper when their goods and services are purchased. The higher wages are, the more people will be able to buy those goods and services. There is no stretch whatsoever in considering that higher wages are good for business. That might be, in part, why a growing number of small business advocates are beginning to support a hike in the minimum wage. [13]

Still it must be conceded that raising the minimum wage to the true living wage of $12.00 per hour immediately might be too much of a shock to the economy. If so, then a gradual approach would be better, utilizing such remedies as public assistance and an earned income tax credit, while the minimum wage incrementally rises to the point of being equal to the true living wage. But the process can begin immediately, and should do so. It will be good for the economy, good for business, good for the public treasuries, and, most importantly, will be good for people.

Jack Quirk