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The Living Wage Proposal - Response to The Minimum Wage Argument

The Living Wage Proposal - Response to The Minimum Wage Argument

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Published by Amber Hauptman
A factual account of the "living wage" concept, the argument for and against, highlighting the inconsistencies of both and finally moving into a proposed resolution by Reece Freeman
A factual account of the "living wage" concept, the argument for and against, highlighting the inconsistencies of both and finally moving into a proposed resolution by Reece Freeman

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Published by: Amber Hauptman on Mar 05, 2013
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03/06/2013

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The Federal Living Wage Proposal
 
At this year’s State of the Union address, President Obama laid out a series of plans for the first year of 
his second term. One of the most controversial ideas introduced was the plan to raise the minimumwage from $7.25 to $9.00 per hour and tie this wage to the national average cost of living. This relatesto a 24% bump in the minimum wage that would be adjusted every year for inflation.The reasoning behind the wage hike is so that full-time workers making this hourly amount would earnmore than the federal poverty level. This fairly liberal concept, called
the “
living wage standard,
hasbeen around since the mid-1990s and has since been adopted by several municipalities across thenation with mostly positive results.
As with nearly all legislation recommended by this administration,the proposal has both fierce critics and staunch advocates.
 Arguments against the Living Wage
Libertarians and many conservatives are completely against the idea of having a minimum wage at all;stating the free market approach is the only way to have a fully-functioning, efficient capitalist economy.However, most economists have decimated this argument, making the point that the labor market is notperfectly competitive since employers almost always have the upper-hand because of 
frictions
in themarket associated with changing jobs; such as the cost of searching for a new job. The minimum wage inmost cases counterbalances this inequality, ensuring that extortion in the market does not occur.
The right’s opposition to the increase in the current minimum wage in the form of a livi
ng wage isfounded in more sensible economics. One argument is that raising the minimum wage increasesunemployment and inflation leading to stagflation as seen in the mid-1970s.
This is because increasingthe costs of production (labor being a large chunk of these costs) decreases the ability for businesses --and small businesses in particular -- to produce at competitive prices. The people on this side of the aislepoint to the late 1990s where the minimum wage was low and so was both inflation andunemployment; a sweet spot economic output level. 
 Arguments for the Living Wage
On the other side of the aisle, many point to the positive effects that come from implementing a livingwage such as a decrease in poverty, a decrease in overall inequality, lower taxes on businesses due togreater operating costs, and an increase in consumption. This bump in consumption is due to higherwages at the lower income levels which are comprised of people with a greater propensity to spendincome rather than store it away in tax shelters.Proponents also point out that even in the high unemployment and stagflation of the 1970s the majorityof the labor force fared better than they do today. The argument continues by explaining that even
when there was low unemployment and high GDP in the late 1990s, wages didn’t increase and thus
inflation stayed low as only the top 20% of the economy reaped the benefits of the economic expansion.This has led to the vast income inequalities we see today. 
 
 The argument that the living wage would cause small businesses to close is also misguided since bothlarge and small businesses would need to adjust prices in order to maintain current profit expectations.
But this is where the administration’s proposal fa
ils the economic litmus test. If we tie the living wage tothe price level, and prices increase in order for businesses to make ends meet, one can easily imagine ascenario in which inflation would then spiral out of control.
 A More Careful Approach
Some economists have suggested connecting the living wage to a more representative economic signal,such as the median income level, instead of fluctuating price levels. Since inflation does not alwaysincrease with economic growth, like in the 90s, this would not only help the lowest wage earners reapthe benefits of a growing economy but would also keep the wage from putting constant upward
pressure on prices regardless of the nation’s economic situation
.In fact, the United Kingdom has already done this by establishing their minimum wage at 46% of the
nation’s
median wage. And not only has this created little, if any, negative effects to economic output;this setting has decreased overall economic inequality.
 One notable inequality economist has madethe point that if the U.S. had implemented similar wage standards in 1968, the current minimum wagewould be above $20 an hour and economic inequality would be at much more reasonable levels.

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