The Living Wage
"Despite the harm to low-wage workers, including those who clean city buildings, drive city contract buses, and help build the city's bright new structures, cities regularly stretch their tax dollars on the backs of these low wage workers." So writes Steve Herndon, a member of the Boulder Living Wage campaign, in the Daily Camera of Boulder, Colorado, my home town. The Living Wage Campaign aims to require cities and universities to pay their employees a "living wage" and to buy their supplies only from producers who pay similarly.
The living wage campaign started in Baltimore in 1995 and has spread to over sixty metropolitan areas. Students have taken up the campaign in universities, including Harvard in the spring of 2001. When I gave a series of talks at Swarthmore College last September, I met with the student living wage committee. They had studied the minimum it takes to live in the Swarthmore area, about $12.50 an hour they said, and were campaigning to persuade the college to pay that amount to all its menial employees.
What causes wages to be what they are? (Please pardon the tiny lesson in economics that follows only two small paragraphs).
Employers pay workers the value of their product (technically, their marginal product, meaning the value one worker adds to the total product). If the worker does not produce a value equal to his or her wage, he or she will not be hired. If one produces more, one's wage must be increased, because if not, the worker will be lured away by someone else.
But how do you determine the "product" of a janitor in a university, or a school bus driver for a municipality? That is determined by comparison with workers in industry (in this letter, "industry" includes agriculture and services). Normally, the municipality or university does not pay more than it has to, just like industry. If wages in the municipality/university fall below those in industry, workers migrate to industry. Nor does the university or municipality see any need to pay more than industry. Thus the wages of university or municipality workers are determined by the productivity of similar workers in industry.
Unionized workers may earn more than non-unionized, but they cannot stray far from the productivity test. Harvard's settlement with the living wage campaign was not to raise wages to the level demanded by the students, but to agree to pay its non-unionized workers the same as unionized workers of equal skill.
I would like to see all workers earn the comfortable wage of at least $12.50 an hour. For this to be sustainable, however, the economy must produce goods and services worth at least $12.50 an hour times the number of worker/hours, plus what is paid in taxes, profits, and other costs. If the economy does not do that, then higher wages only bring inflation too much money chasing too few goods.
If we truly want all workers to earn more, we must find ways to increase the productivity of industrial workers. For municipality/university workers to earn more, industrial workers must produce more. If the living wage is put into effect but the productivity of industry does not increase, the consequences are adverse. First, labor will become two-tiered: higher earners in municipalities and universities than in industry for the same work. More workers than are needed will line up for jobs in municipalities/universities, and industrial workers will be dissatisfied. Second, inflation will cause the "living wage" to be eroded. It will buy less and less. Third, someone has to pay the living wage. For municipalities, that will be taxpayers. Since we are a democracy, they may very well refuse, and the city will be left with a deficit, to be paid by our children and grandchildren.
When I asked the Swarthmore students if they would be willing to pay higher tuitions to cover the living wage, they answered "No." The higher wage should be paid from the college's endowment. But the income from this endowment reduces their tuition. (As in most colleges, Swarthmore students do not pay their full cost). If the endowment is diminished, their tuition would increase, or else their library would buy fewer books and their laboratories less equipment. Swarthmore would not be Swarthmore, and new applicants might go to Haverford (unless Haverford did the same).
There are even more adverse effects. Studies of an increased minimum wage have shown that it usually causes employers to shift from workers to machines, where possible. This leaves unemployed workers. Guess who they will be? Mostly minority groups and women, against whom employers are prejudiced. The minimum wage was increased almost yearly from 1961 to 1981. During that time unemployment for African American teenagers increased fourfold, to 40.7% (see my book, Seeking Truth Together, p. 25). Thus higher than market wages discriminate against women, African Americans, and teenagers.
"What do we mean by a living wage?" I asked the Swarthmore students. When I was their age, I told them, menial workers earned about one tenth what they do now (adjusted for inflation). How did they live? Their reply, reasonably, was that today's culture is different. Standards of housing, health, and other necessities are higher, and we must keep up with the times.
Yet it seemed that those demanding living wages for others were also demanding that still others pay for them (taxpayers, library users, their children, etc.) Is this the trend of the times? that we are so kindhearted that we wish others would have the standard of living that we do, but we always want still others to pay for that? Do we demand that the poor live like the middle class, without having the skills or education to produce the standard of living of the middle class?
This is the dilemma that I leave you, readers. Please let me know what you think,
Sincerely your friend,
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Peter Belmont of Brooklyn (NY) has suggested a universal stipend paid by the government, along with minimal lodging and cheap food, to keep people alive. Beyond that, we would have a free market economy and no need for a minimum wage.
Unfortunately, Peter's letter is much too long for me to publish, and I do not see a key paragraph for my usual excerpt. Reminder to other readers: please keep your letters short! My correspondence is approaching my capacity of 24 hours a day. Until that capacity is reached, I will answer longer letters but cannot publish all of them. Thank you. Jack
My city, Lansing MI, has an income tax of 1% on residents and 1/2% on non-residents that work in the city. In the last 40 years or so, virtually all commerce has relocated outside of the city limits and all of the high income housing developments. Our downtown is limited to a community college, a law school (nation's 2nd largest) and state, city, and county governments. It takes huge tax breaks to retain the historic auto plants and they are just assembly units with the parts being manufactured in area plants also located outside the city.
The "living wage" will be death to most urban economies.
Jim Booth, Red Cedar Meeting, Lansing (MI).
The logic of your comments here reminded me of a radio-talk-show caller who recently complained about her taxes and then opined that corporations should pay a greater share of the nation's tax burden (thereby reducing her own obligation, presumably). She clearly had no idea who ultimately pays corporate taxes. Advocates of the "living wage" are afflicted by the same sort of short-sightedness: they advocate for one group in society at the expense of everyone else especially those who can least afford it. You make the point nicely, Jack.
Ken Allison, Episcopalian, Paradise Valley, AZ.
As I have said before I don't believe I have a firm grasp of economics. However it appears to me that students and "liberals" are idealistic but naive. The "Living Wage" folks were communists/socialists 30-100 years ago but now that those dreams have crashed they're trying to dress the same notions in new clothes, and thus it ever will be.
Maurice Boyd, Friends Meeting of Washington.
I appreciated your analysis of the economically flawed arguments of the living wage movement. I have made a similar case regarding the minimum wage (see William Ashworth, The Economy of Nature, Houghton Mifflin, 1995, pp. 284-286). However, I suspect neither one of us has much chance of being listened to, because the real point of concern for living-wage advocates is not economic but moral it has less to do with what people earn at the bottom than it does with the excess that is being scarfed up by people at the top. Distributional issues are real, and the problem is worsening. According to the latest figures from Forbes, America's 400 richest individuals are worth a combined total of $1.2 trillion, or an average of $3 billion each. If we let those 400 keep $150,000 each and then parceled the rest out among the remaining 200 million of us, we would end up with nearly $5,000 apiece. This is a problem for which I have yet to see a satisfactory solution, aside from the old suggestion made by Charles Ives (yes, that Charles Ives) to create a maximum allowable income. Does the Classic Liberal Quaker have any thoughts on this matter?
Bill Ashworth (South Mountain Friends Meeting, Ashland, Oregon).
Yes, see above. Jack
Friends, I am a business executive. We can only pay what the worker earns in economic terms as you have said. The next challenge is to increase the value of the contribution that the worker makes so that we can afford to pay them more. This is the fun challenge. It is the great win-win.
Lee B. Thomas, Jr. Louisville (KY) Friends Meeting.
An alternative that might be worth considering to achieve the same goal would be reducing the standard of living to the wages that will support it for everyone. Not likely to be a popular edict if handed out from above, but the voluntary simplicity movement might be more effective in the long run than the living wage + increased production approach, especially when you compare the long-term environmental impacts of either approach.
Merlyn Holmes, Unitarian, Boulder (CO).
Unlike the students you discussed "living wage" with, I'm willing to pay more so that those at the bottom could live better. This is, in other words, a redistribution of income. Some years ago César Chavez began a grape boycott to force growers to recognize a union so that wages would be higher for agricultural workers. It didn't work. We are accustomed to buying inexpensive food while we exploit those who produce it.
Virginia Flagg, San Diego (CA) Friends Meeting.
OK Jack, explain how CEO salaries are set, how come American CEO's earn so much more than European CEO's. Tell me why CEO salaries maintain during down cycles when companies are laying off workers and losing money? Why aren't they subject to market forces?
Charlie Thomas, attending Cascabel Worship Group Arizona.
The reader has the last word. Usually (not always) I do not reply, so as not to keep the dialogue going interminably. Especially is this so when someone hits me with a one-liner that requires extensive, complex economics to answer. The short answer here would be that the productivity of European businesses is, on average, much lower than the American. The long answer would be to explain why. There are explanations, but you have to look for them in a more sophisticated economics journal than this one. Jack
The problem with all these economic discussions is that people see that they do not apply to CEO's and other high managers who get paid fabulous sums that do not appear at all related to the value of their work. The market is skewed because the board members who employ them tend to be in the same position themselves and so their self-interest skews their perception of the real value. And people perceive the luxuriousness of the management quarters (in many cases) compared to the workers. I know, as you do, that these expenses are a drop in the bucket (but just try and tell people that). Cutting them would not make a real difference to a large company, but it would make an enormous difference to public perceptions.
Bruce Hawkins, Northampton (MA) Friends Meeting.
I enjoyed the discussion of "living wage". Apparently it has perverse consequences, like rent control. In a more perfect world, people working a lot more than 40 hours a week would be able to afford rent and medical care, including prescription drugs. I think real estate prices are on a separate track (especially out here), owing to land scarcity. Drug prices puzzle me, since prices are lower in Canada and Europe.
Trudy Reagan, Palo Alto (CA) Friends Meeting.
Drug producers have very heavy fixed costs, including the costs of research in seeking drugs for particular ailments, and many drugs do not pan out. Somebody has to pay these costs, and they stick them on consumers who can pay more. If Americans are richer than Canadians, drug prices will tend to be higher in the US than in Canada. Also, if the Canadian government (with its health care program) puts a cap on drug prices (I don't know whether they do or not), then they would shift those costs to US consumers. If every government put a cap on drug prices, pharmaceutical companies would go out of business. Jack
Thanks for this piece. I think it sets up one side of the argument. Good for discussion. I'm not sure that the labor market works as rationally or as equitably as your model. The push for a living wage here in Lawrence focuses only on firms moving into town with substantial tax benefits and public financing of one kind or another. I'll forward your message to one of the key people in the living wage movement here, incidentally funded by some Quaker source.
Howard Baumgartel, Oread Friends Meeting, Lawrence, KS.
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