Living Wage Versus Minimum Wage

Should every worker receive a living wage? 

There are movements in many states to raise legislated minimum wages up to levels that will support American families.   Examples abound in Washington, Massachusettes and Kansas. DC has signaled that a living wage is necessary for Wal-Mart, even as unions maneuver to avoid the issue.  

Some businesses also claim to support “a Fair Minimum Wage."  That phrase bothers me, because it seems that fair always means, “more.”  I’ve only known one person who has ever argued that, “in order to be paid fairly, I should be paid less."  And he was supremely talented, if modest.

A “living wage” would greatly exceed $7.25 an hour.  Pundits who have never met a payroll see no particular implications from massive increases to the US federal minimum wage.  Moving the minimum floor rate from $7.25 to $10 an hour would mean a 40% increase; going to $12 an hour is a 65% increase; and hitting $12.50/hr would be more than a 72% jump. 

No big deal, proponents casually proclaim, citing a labor center study saying that if all minimum wage Wal-Mart employees were raised to $12/hr, it would not translate to much of a price increase for the average shopper.  But what if EVERY Wal-Mart employee were granted the same proportional increase?  There is a ripple effect to minimum wage increases.  Please note, those already paid above the old minimum wage would immediately argue that they each should be granted either the same absolute increase (dollars and cents more) or the same relative percentage (relative percentage increase from minimum rate to the new rate).  Those veteran workers hired years ago at $8/hr who now make $10/hr would bristle at being paid less than the most recently hired lowest-seniority worker, so EVERY Wal-Mart worker making less than upper management salaries would expect and demand an equity increase.  That would cost a whole lot more than 46 cents a shopping trip.  

Forbes had a temperate and thoughtful article about how the DC “living wage” conflict shows the relative weakness of retailers, but the media coverage tends to overlook the different purposes of a Minimum Wage versus a Living Wage. 

Every single worker does not support a family all by themselves.  Why should high school kids still living at home be paid as if they were their parents?  It makes sense to have a minimum entry rate  for unskilled workers without any particular talents or experience to offer. 

Hiring at a discounted hourly rate showing their relative lack of productive value, employers can afford to train the unskilled, build their abilities and develop their experiences so the trainees can command sufficient income to support a family.  Artificially inflating the minwage beyond its economic equalibrium point will remove the incentive for companies to hire novices when they must pay them the same as experienced candidates.  People have to start somewhere.  Continuums exist for a reason, to show scale and to permit relative differentiation.

Those who have worked at minimum wage levels for years have experienced the painful process of creating personal employment value.  Companies are willing to pay for better KSAs, but should every employer be required by law to pay more than they feel is proper?  Does our economy need better jobs or better candidates?  Better pay  tends to flow to better prepared workers.  Should that change?  If more money flows to the least valuable people, what happens to the better qualified talent?

These are important questions that should be addressed by the total rewards community rather than by politicians.  Otherwise, the answers will be dictated by legislators.

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.

Creative Commons image "Ripple Effect" by maiq gomez

Comments

[John A Bushfield]

Jim - It's a difficult issue. I have great empathy for those who struggle, with family or not, to make it on $7.25/hour. At the same time, our economic way of life is predicated on supply and demand; employers who pay minimum wage are able to fill those jobs at that rate, presumably with candidates who have the requisite skills.

Given the increasing disparity between low wage and high wage earners, I'm surprised that the labor movement is losing ground, when historically it was collective action that changed things for the American worker. My hunch is that if the gap continues to grow at the rate we are experiencing, some type of collective action, organized or not, is inevitable.

Individuals are responsible for their own success, but we all need help along the way. As a matter of both compassion and sound business strategy, employers should be helping low wage workers improve their skills and abilities in order to qualify for higher paying jobs. Otherwise that 'help' will be superimposed on employers, either by the government or some form of collective action, both of which are bad for business.

[Dave Johnston, ABC]

If money talks, what does minimum wage say? Chris Rock said it best: "Minimum wage says, 'If I COULD pay you less, I would'."

[E. James (Jim) Brennan]

John: all you say is quite true. Suspect that the decline in union power is directly related to the development of people-sensitive management styles. The more mature HR function now polices against the typical abuses that stimulated worker organization for collective bargaining in the past to get protection. Also, this is the era of the individual who is reluctant to surrender personal autonomy.

Dave: too true to be funny, in some cases. In others, it is simply a legislated floor regardless of the local economic reality.

[E. James (Jim) Brennan]

Update: as of 9/12/13, the DC bill which would require large retailers to pay $12.50/hr minimum UNLESS they are unionized passed but was vetoed by the mayor as economically damaging. I would be surprised if the mayor's veto is not over-ridden by the city council.

[Martha]

Can I simply just say what a relief to find a person that genuinely understands what they are discussing on the internet. You actually know how to bring an issue to light and make it important. More people really need to read this and understand this side of your story. I was surprised you are not more popular given that you certainly possess the gift.