I hear a lot that some people believe their wage is not livable. I understand that this trivially means that they do not have enough money to pay for rent, food, child support, etc.
But given that the cost of all of these things fluctuate, how are we to determine what a living wage is? I’m not an economist, so what would prevent prices from increasing after, for example, a $15 federal minimum wage is established, thus leading to that not being a living wage?
To me, it seems like the real issue is cost, or more specifically the ratio between income and cost. Thanks for helping me understand this issue and debating it.
Costs rising would be inflation. Inflation is caused by monetary policy and not by the minimum wage. Most of the difference in cost of living between localities is caused by the price of land which is governed by land use regulations and not the minimum wage.
First, thanks to the other two posters for those sources of information. I will check them out when I am able.
As far as rising costs, I should have been more specific. I meant rising costs from sources other than just inflation. More specifically, costs that could be tied to a large, widespread increase in the minimum wage. I only have a basic college-level understanding of business finance (IT major), but wouldn’t higher wages mean higher costs for businesses, and thus higher prices? Additionally, wouldn’t an overall higher ability to pay for products and services by the consumer base lead to an incentive to increase prices similar to supply and demand?
These and other theoretical sources of cost increase was what I was thinking of. Someone who is more knowledgeable of economy than me please feel free to tell me if I am off-base.
Generally not that much. Depends on the industry and the actual increase but in most cases, wages are a small part of the overall costs.
Example: I was a delivery driver for a beverage distributor. A typical load was 12-25,000 (invoice) worth of product. I was making 12/hr so a 8 hour day was 96 dollars in wages. A 20% raise would only increase the daily wage by 24 dollars. A pittance compared to the cost of the merchandise I was carrying.
But someone had to make that product, and their salaries would be increased, too. And the people who made and serviced your truck, as well as the people who loaded and unloaded the truck. I think you have significantly underestimated the increase in cost to that load you’re schlepping around.
Maybe I don’t understand - a general rise in prices is inflation.
Yes, in general. Very few workers make minimum wage (around 4%) and about half of those who do are not supporting themselves or a family. So raising their wages by law isn’t going to have that much effect on the rest of the economy. Raising the MW to a living wage would have much more of an effect, depending on how high the living wage is set.
Should be noted that some additional immediate effect would exist with even an increase in the minimum wage, because the workers who’s wages are scaled off that will also experience increases. Thus, in a McDonald’s restaurant, after some number of months, you can expect some increase in your wage (probably small, like 50 cents an hour). Having received that increase, you’re not going to be given the new minimum wage, along with everyone “new” at the restaurant. I always think of the effect as being a bit like a spring wave, compressing the lower end of the scale upwards, then working that compression up through the wage structure until it dissipates.
Higher wages mean businesses bear higher costs, sure. But that doesn’t necessarily cause higher prices in all cases because producers are only part of the supply-demand relationship. As a business, you might want/need to earn more revenue, but doesn’t necessarily mean consumers will be willing to pay higher prices. On the supply side, alternative outcomes to higher prices would be things like the business just absorbing the cost and accepting a lower profit (because consumers won’t accept a higher price), scaling back production/shutting down (which reduces supply and may increase prices, depending on the nature of the demand), etc…
Demand-wise, just because consumers have more money doesn’t necessarily mean they would want to spend more. They may choose instead to save or pay down debt, for example. Also, demand and consumption patterns vary; one common example is that poorer people who get more money tend to spend it, because they need to; more affluent folks will not necessarily spend additional money just because they have it.
Taking good old McDonald’s, in 2015:
Revenue: $25.4 Billion
Cost of Revenue: $15.6 Billion
Cost of Selling/Admin/Other: $2.7 Billion
Operating Income: $7.1 Billion
So now, what happens if you forcibly increase wages? Does McD’s just eat the increase costs and remain satisfied with a lower income? Do they shut down some of the stores, because they decide that the loss in revenue from closing some of the stores is a net benefit to their bottom line because they also save on costs? Do they try to raise prices, and if they do, do the customers accept it? Will consumers want more Big Macs and French Fries now that they have more money, and if demand does increase as result of consumers having more income, is McD’s better off raising prices or just selling more food at the now-lower profit margins?
All those people’s wages would only be increased if their initial wage was below the level set for the living wage, surely?
So, yeah, if all wages below the living wage are increased to the living wage, this will have a somewhat inflationary effect. But it will be patchy - biggest in relation to good/services where the costs of production are largely made up by paying wages to low-wage employees, smallest in relation to goods/services where the reverse is the case.
Then we need to look at the basket of goods and services that is used to compute the living wage. To what extent does it comprise goods/services whose cost is likely to rise because of the imposition of the living wage (e.g. childcare)? To what extent does it comprise goods/services whose cost will be largely or wholly unaffected (e.g. rent)? And you need to take account of where the goods and services are coming from; the “living wage” is calculated locally, so the cost of something not produced locally is likely to be affected by the level of the living wage (if any) imposed where it is produced much more than by the level of the living wage where it is sold.
All in all, working out the impact of imposing a living wage requirement on the calculation of the level of the living wage is not straightforward.
Yes and no. If you’re making $15/hr and the MW is $10/hr and the PTB decide to raise the MW to a LW of $15/hr, you’re going to feel like your wages should be raised, too. They won’t always be raised for everyone, but surely they will be for some.
Some businesses are able to pass along higher labor costs, others can not, it just depends on the type of business. The most likely scenario is that those businesses which use alot of labor are hurt and those which use less will be helped.
On the demand side, there would likely be more demand from those who are now making more but it would be offset by those who are no longer making anything. So the would be a transfer of demand from the newly unemployed to the newly hired paid but not necessarily of change of level. Depending on other factors demand could go up in total or could totally crater.
Interesting. For my area, I would say that is right on! It shows the living wage being just about 3.5% higher than what I am currently making, and for the last year it has certainly been a struggle just to barely stay afloat.
Not every company employs people at the minimum wage. Washington’s minimum wage is higher than the national one. I’m guessing that most people in the U.S. receive a higher wage than the national minimum. Of course, the minimum wage is not a living wage. Would raising the minimum wage raise costs for businesses?
Yes, costs would rise for some – but not all – businesses. Many businesses would not be affected. The thing is, when people at the lower end of the wage scale have more money, they put it back into the economy. When people are buying more, demand increases. More demand may increase prices on some things, but not on everything. When demand rises, most businesses tend to increase production to meet it. When production increases, it tends to result in more people being hired. Of course, hiring people is an expense. But as a business expense, it’s generally deductible. Also, there are more people with more money, who tend to use their money to buy things.
Rampant inflation is bad. I think deflation is worse. Some inflation is good, especially if the worker gets a cost-of-living increase. To use a ludicrous example, I owe about $41,000 on my house, and it will take me nine more years to pay it off at the present rate. But let’s say there’s extreme inflation that results in my salary being ten times what it is today. I could pay off my house in a couple of months because my salary went up and the loan amount stayed the same. Obviously, the ludicrous scenario would be disastrous in real life; but the principle is the same. When money is worth less, debts are cheaper.
So I think that raising the minimum wage to a level where people can participate in the economy would boost the economy through increased spending and higher employment, and the well-being of citizens would increase. There will probably be some inflation, which would be good for people with debts; but I don’t believe there would be super-inflation that would cause problems.
I think a lot of time the problem is that it is too easy to get in debt in this society but sometimes it is just unavoidable and necessary to acquire some debt. If you are starting out in life from scratch you pretty much have to have a cell phone for things like work, it doesn’t have to be a smart phone, it could be a track phone but some of those are rip-offs too. Depending where you live you may require a car, and you are going to most likely if you are just starting out have to finance said car and then add in insurance, maintenance, gas, etc. Its good to have a credit card for emergencies, but its so tempting to use it for other things if you are running a little low that month and it begins a vicious cycle.
My Mom doesn’t make very much money but probably enough to live in my area where the cost of living is fairly low, she only makes about $30,000 a year but twice in the past year had two major medical episodes and just wracked with medical debt even though she works for a hospital and you would think she has pretty good insurance. So now she can’t really make ends meet with her salary and she owes the money to her employer, she has had to borrow money from her retirement 401k, which doesn’t have that much saved for someone her age, and she still hasn’t paid off all her medical bills or even come close really. She has been working her whole life but has no savings in the bank and only a little bit of money in her retirement account, she’ll basically never be able to stop working if she wants to have a roof over her head, although I would let her move in with me if it came down to that, there are probably a lot of people whose only safety nets in this world are their family and a lot of people don’t have that to fall back on.
This is a VERY common misconception – even many professional economists believe it – but it is incorrect. Rising prices are a symptom of inflation.
You see, dollars are like everything else. The more there are of them, the less each one is worth. If you have a pool of workers making $10/hour, the prices of many things are limited to what those workers can afford to pay. But if you suddenly raise all those wages to $15/hour – presto! Suddenly each worker can afford to pay 50% more for the same set of items. Now you have expanded (or inflated) the money supply by 50%, while the set of items available for purchase remains the same. The sellers of those items naturally raise their prices. But the value of those items did not change. The value of each individual dollar went down, so now it naturally takes more dollars to purchase the same set of goods.