"Moreover, as employers are forced to pay low-skilled workers a higher wage, they are less likely to hire such workers. Citing a study by Michigan State University's David Neumark, Horowitz writes that a living wage set at 50 percent above the minimum wage increases the average wage for workers in the bottom tenth on the pay scale by 3.5 percent. However, the same wage increase reduces the...
Minimum and Living Wage
According to the U.S. Census Bureau, more than 30 million Americans are living in poverty. So many people living in poverty in one of the richest countries in the world begs the question: Why? In order to change this statistic, many people call for government to institute a minimum or living wage.
The idea of minimum and living wages is partially based on a central part of Catholic social teaching. In Rerum Novarum, Pope Leo XIII wrote defending the property rights of capital owners, but also asserted that "wages ought not to be insufficient to support a frugal and well-behaved wage-earner," with "the State being appealed to, should circumstances require, for [the wage earner's interests'] sanction and protection." Key philosophical reasoning for the minimum wage can also be found in Progressivism and Marxism, which have as one of their goals the ever-increasing equality of income across society.
Minimum and living wages are a government-mandated floor on the price of labor, meaning employers and employees cannot enter into a contract with one another for wages below a certain dollar amount per hour.
In the United States, minimum wage laws were ruled unconstitutional by the Supreme Court until 1937, when a minimum wage was upheld for the "protection of the community against evils menacing the health, safety, morals, and welfare of the people." In 1938 Franklin D. Roosevelt signed into law the first U.S. minimum wage law. The Fair Labor Standards Act established a minimum hourly wage of 25 cents. It has been raised several times and is currently at $7.25/hr. Of 48 countries surveyed in 2006, more than 80% had minimum wage laws within their borders.
A living wage is usually based on the poverty level and often changes depending on whether or not health benefits are included. As a result, it tends to be considerably higher than applicable minimum wage laws require. The scope of living wage ordinances is most often limited to employers contracting with a city, although some ordinances also apply more broadly to any employer receiving financial assistance from the city, and a few cities even apply it to all businesses. More than 120 cities in the U.S. have living wage laws on the books; the highest one exists in San Leandro, California.
Minimum and living wages have always been a controversial issue. Supporters believe that a wage is fundamentally unjust if one cannot live on it; anyone willing to work deserves a wage high enough to keep them out of poverty. Most people in poverty are working but still cannot afford the basic necessities because of low wages. Not only does this kind of poverty increase homelessness, it reduces the dignity of those who are forced to accept government welfare to make ends meet. Arguments like these led presidents Roosevelt, Clinton, and Obama each to call for a minimum wage that can be a living wage at some point in their presidency.
Those who argue against minimum or living wages generally agree on a number of things about the effects of the minimum wage. In a nutshell, they believe it reduces employment. An extremely simplified example of this is as follows: Firm X can afford to hire 10 people at $7.25 an hour; its total labor costs are $72.50 per hour. If it is required to pay ten dollars an hour, and its labor budget has not changed, it now can only employ 7 people. Another point made is that those workers most likely to lose their jobs or unable to find a job will be the workers already most vulnerable to unemployment: the young, the inexperienced, and the unskilled. The owner of Firm X will keep his best, most experienced workers as they return the most value. This creates a vicious cycle for those vulnerable workers, because they cannot offer their labor for a lower price in order to gain the skills and experience necessary to better compete in the labor market.
Opponents of minimum and living wages also point out that a government-mandated wage increase is unconstitutional. As Justice Sutherland put it in his opinion on the Adkins v. Children's Hospital of DC case, "The statute now under consideration is attacked upon the ground that it authorizes an unconstitutional interference with the freedom of contract included within the guaranties of the due process clause of the Fifth Amendment."
Unfortunately, for those who genuinely believe that poverty due to low wages is a problem, but that having government force the payment of higher wages is not the answer, there seem to be few options. Christopher Chope, a Member of Parliament in the UK House of Commons, suggested an opt-out solution. Under his proposal, those with few skills and little experience would be allowed to negotiate their own wage below the minimum to satisfaction of both parties. This would protect freedom of contract and allow unskilled workers to gain more work experience rather than remain unemployed and unemployable. Another choice is not so much a direct attack on poverty, but a more general boost to the economy, the effects of which would trickle down and be felt by those currently in poverty. When the economy grows, wages grow, as Adam Smith pointed out:
"It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest."
This topic page provides a comprehensive examination of minimum wage and living wage laws. It explores the philosophical foundations and the historical context of mandated minimum wages while covering both sides of the recent and current debate over the minimum wage's or living wage's use.
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