Friday, September 19, 2014

The "Living Wage" Sham

The campaign to raise the minimum wage here in San Diego has been fraught with distortions and misleading information.  Thankfully, it looks like we will see the wage hike put to the voters in June 2015 2016.  Why the wait?  I'll find out.

The arguments for a minimum wage boost are fraught with emotionalism: always expected from the left.  But how much help does the minimum wage boost provide and does it do what its supporters say it will?  Since 79% of those receiving the minimum wage work part-time (national statistic), let's assume that a minimum wage worker averages 29 hours per week (from 2010 census data).  The San Diego minimum was set to increase $11.50 per hour against a new state minimum of $10.00 per hour (as of 2016).  That works out to $17,342 vs. $15,008 per year.  Can anyone support a family on $15,600 per year?  Of course not, but $17K isn't going to cut it either.

The main argument for increasing the minimum wage is that we should pay a "living wage" (also called a social wage by some economists).  The theory is that wages below that needed to pay for basic living expenses are exploitive because the employer shifts social costs to society. It presupposes that such workers are forever stuck in such jobs and have no other options.  It also presupposes that large numbers of people earn what the minimum wage law dictates, but that is only about 2% of the workforce.

In fact, minimum wage jobs are intended to be stepping stones as employees gain skills and work experience.  A study that is now over a decade old stated that nearly two-thirds of minimum wage workers get a pay raise after a year on the job.  We also know that minimum wage workers are likely to be young (less than 24).  I posit that they are often living with their parents. This makes the calculation of a "living wage" problematic because the "social cost" of labor varies widely with age.  Certainly there are other circumstances that greatly vary the social cost of labor.  In order to help the relatively few workers who are full time heads of household, are we going to reduce employment opportunities for younger workers who need to build work experience?

The other myth regarding the "living wage" is that heads of household earning the minimum wage have no other supplements to income (some data based on two parents, one child making $17,000 per year):
  • Many minimum wage workers are in industries where tips supplement income.  Nationally, tips earn an average of $8 an hour.  (I have no local figures.)
  • The Earned Income tax credit can provide up to $3250 in additional annual income.
  • The annual value of food stamps is $1789 in California for low income persons.
  • The annual value of Medicaid for poor families is equivalent to a $4500 insurance policy in California.
  • Students who earn the minimum wage may use student loans for room and board while they gain skills to increase their employment value.  (Helping students was one of the arguments raised by the proponents of the increase.)
In general, we provide social safety nets for those making the minimum wage.  Raising it may feel good, but it penalizes employers whom we need to keep our fragile economic recovery on track.

There are some other myths used to support a minimum wage rise that I will take on in other columns.  I note that the studies regarding macro-economic benefits of minimum wage increases apply to states or countries, not individual cities and there is reason to believe that they wouldn't hold up for a single city.

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