What is a "living wage?"

[Shodan]

I understand your distinction, I think. You are agreeing with puddleglum, which is nearly always a good idea.

If it affects my argument, or Humble Thinker’s, I hope you explain how. An increase in nominal wages without an increase in productivity inflates the money supply and leads to higher prices, all other things being equal.

If that helps.

Regards,
Shodan

[puddleglum]

@Flyer

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.

Your definition of inflation is in no way different than mine.
However your second paragraph has no relationship to the definition. If you pay everyone 50% more you have not created any new money. Just moved existing money around. The new spending being done by the richer workers is exactly matched by the lower spending of whoever had the money before. So if demand for hamburgers goes up and their prices rise, then demand for steak would go down and that price would fall. Prices in various sectors would change but inflation for the economy as a whole would not change.

[puddleglum]

@Johnny_L.A

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.

Is there a limit to how high the minimum wage could go and still be good? If so is this limit a threshold or does it matter on the margin?

[Johnny_L.A]

@puddleglum

Is there a limit to how high the minimum wage could go and still be good? If so is this limit a threshold or does it matter on the margin?

IANA Economist, but it seems obvious that there must be an upper limit. I agree with FDR’s idea of a lower limit:

@Franklin D. Roosevelt

It seems to me to be equally plain that no business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By “business” I mean the whole of commerce as well as the whole of industry; by workers I mean all workers, the white collar class as well as the men in overalls; and by living wages I mean more than a bare subsistence level-I mean the wages of decent living.

That is, a living wage should be high enough so that people not only have enough money for bare subsistence, but may also have enough money to buy some consumer goods.

But what about inflation?

@Franklin D. Roosevelt

I am fully aware that wage increases will eventually raise costs, but I ask that managements give first consideration to the improvement of operating figures by greatly increased sales to be expected from the rising purchasing power of the public. That is good economics and good business. The aim of this whole effort is to restore our rich domestic market by raising its vast consuming capacity. If we now inflate prices as fast and as far as we increase wages, the whole project will be set at naught. We cannot hope for the full effect of this plan unless, in these first critical months, and, even at the expense of full initial profits, we defer price increases as long as possible. If we can thus start a strong, sound, upward spiral of business activity, our industries will have little doubt of black-ink operations in the last quarter of this year. The pent-up demand of this people is very great and if we can release it on so broad a front, we need not fear a lagging recovery. There is greater danger of too much feverish speed.

If there were no upper limit to the minimum wage, then people who are making more than the minimum wage now, would feel ill-used, and businesses would have to raise their wages and raise prices to afford it. A downward spiral is bad, as can be seen in the link in my previous post. Similarly, and positive-feedback upward spiral is also bad. What we need is equilibrium.

The thing to remember is that there is a difference between a ‘minimum wage’ and a ‘living wage’. A minimum wage can be any rate. A living wage is a necessary rate. I think the way to reach an economically sound equilibrium is to make the minimum wage equal to the living wage. This will result in some inflation, but some inflation is good. (Especially for my mortgage. )

[Calico_Jack]

@HumbleThinker

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.

I’d say it’s a bit subjective, therefore statistics alone won’t do it justice.

But my principle as for what a living wage is would be the bare minim needed to afford food, shelter, and transportation. This of course would also assume the person is a full-time worker.

Somewhere just above ‘subsistence’ (e.x. even though a person could ‘survive’ living in solitary confinement I’d say that’s a bit low in standard), but would not have mandatory accommodations for luxuries such as cable TV, the newest generation gaming consoles, high-end smartphones, etc. But it’d have to be a bit more than the bare minimum to survive living in a basement and never going outside.

I think the best way to figure it out would be to look at and compare historical case studies and get an idea of what’s been considered the ‘golden mean’. Obviously taxpayer-funded Xboxes and smartphones is excessive, but if it’s only as defined as the bare minimum to survive living in a basement on ramen noodles and Walmart-brand coca-cola, then that’s too stark.

[Calico_Jack]

@Ruken

I always get a kick out of this calculator, punching in places I’ve lived well on supposedly unlivable wages.

Right, this is why statistics alone aren’t a good metric.

Problem I’ve observed with statistics is they are based on ‘averages’ which are not realistically applicable to every individual.

For example I hear some people lament the price of food, and even stooping to argue that it’s ‘cheaper’ to buy processed food than to buy ‘healthy’ food.

Which is ridiculous - you can buy a 20 lb back of long-grain rice at a grocery store for just under $9, about the same price as a single Quarter Pounder meal with all the trimmings:

https://www.walmart.com/ip/Great-Value-Long-Grain-Enriched-Rice-20-Lb/10315883

[puddleglum]

@Johnny_L.A

IANA Economist, but it seems obvious that there must be an upper limit. I agree with FDR’s idea of a lower limit:

That is, a living wage should be high enough so that people not only have enough money for bare subsistence, but may also have enough money to buy some consumer goods.

But what about inflation?

If there were no upper limit to the minimum wage, then people who are making more than the minimum wage now, would feel ill-used, and businesses would have to raise their wages and raise prices to afford it. A downward spiral is bad, as can be seen in the link in my previous post. Similarly, and positive-feedback upward spiral is also bad. What we need is equilibrium.

The thing to remember is that there is a difference between a ‘minimum wage’ and a ‘living wage’. A minimum wage can be any rate. A living wage is a necessary rate. I think the way to reach an economically sound equilibrium is to make the minimum wage equal to the living wage. This will result in some inflation, but some inflation is good. (Especially for my mortgage. )

I don’t see how you are differentiating between a good wage increase and a bad wage increase. Why is 15$/hr the magic number? If 15 if good why wouldn’t 20 be better?
Do you know what the average unemployment rate during FDR’s presidency?

[Johnny_L.A]

@puddleglum

I don’t see how you are differentiating between a good wage increase and a bad wage increase. Why is 15$/hr the magic number? If 15 if good why wouldn’t 20 be better?

You have a five-gallon jerry can. Why not put ten gallons in it, instead of only five? You’re talking about a $15/hour minimum wage. I am taking about a living wage, and I’m not specifying a number. Minimum wage ≠ living wage.

Perhaps I should have defined ‘living wage’, giving an example by a famous person.

[Shodan]

Who would be paid a living wage, and who would be paid a minimum wage?

Regards,
Shodan