livingwage

Living wage

by Bob on November 12, 2007

A student at the university was asking me about the definition and practicality and feasibility of having a "decent wage" paid to an employee for his work in his Labor Markets research. It is not my field of specialization but I did have a long discussion with him. So my thoughts were quite complicated as is the actual question, despite it seeming to be a simple question.

A "living wage" is either (a) very definable, or (b) very elusive to define pragmatically.

Clearly, if a worker is not over-spending in terms of daily "reasonable" costs of goods and arrangements such as rent, mortgage, utilities, etc. this can be well understood. A pair of shoes has a certain lifetime of utility. One doesn't need a new pair every week. A quart of milk has a normative cost, hopefully. Paper towels are reasonably priced, unless a household or family uses ten rolls a day which is off the normative graph.

In such reasonable cases, an employer can readily define a decent wage and "living" wage. If a person is single, it's likely less in practice, or if the worker has four children and a wife at home, it's more expensive. So for a "flat" and "normative" living wage, we have to get parameters to it: regional costs (Boston's milk is more expensive than in North Carolina, or rent is cheaper in Fall River, Massachusetts than in downtown Boston, etc.), number of people in the family, amount of reasonable debt service (interest payments to credit cards, etc. which can be prohibitive), etc.

If we follow a reasonable spending habit, we can, with the Cost of Living Index per region, define what a "living wage" or "decent wage" should be.

The US "minimal wage" is supposed to index off needs, but is known to fall short of this goal. It has to figure out how many shirts a person will need,how many shoes a family will need, in addition to fixed costs such as housing, utilities (electric, gas, water), and in suburban areas, gasoline prices.

So we are faced with a challenge: to define this "fair wage".

Now are companies obligated to pay a defined "fair wage" ? Well, they should but that is not always the case. In a recession, for example, people take whatever job they can get, so this gives the companies an advantage to paradoxically pay a lower wage in a time when people might need more to survive.

Companies used to pay a "fair wage". Companies who didn't have to negotiate with unions paid better, again paradoxically. That's because trade unionism is a very sticky topic. Most unions just collect dues and do little for their members. This has caused many scandals. In a perfect world, trade unionism would be acceptable. But we don't live in a perfect world. Unions get corrupted. Union officials especially. And the money from the members disappears.

Many companies used to be "paternalistic". They would treat their employees reasonably well, pay them a "living wage", give them benefits and job security, in some cases for life. That has all changed now.

The top expenses for a person are usually abode, that is, the cost of living space. Necessary utilities such as electric, gas, water then come in if they are not included in the rent for an apartment. For a homeowner, it's different: they have to pay all utilities. Now the employee is being asked to pay part if not most of his family's medical insurance -- which fewer companies are giving as a benefit. With medical costs skyrocketing, this could be an extraordinary amount, especially for prescription drugs.

So the model has shifted.

Should a normal family be expected to have cable TV as opposed to only channels which are free and in the airwaves ? Cable TV can be very expensive when the premium movie channels come in.

Should a normal family be expected to own a computer with a high-speed digital connection to the internet ? That can be expensive.

Should a family be expected to own a new car every three years or even have a car or SUV instead of a car ? Car insurance is very expensive too.

So what are usual and customary expenses for a worker ?

In some sense this can be defined. In other senses it is very subjective and a matter of personal choice.

An underlying aspect to this all is the basis of a free market economy and free labor market: namely, if an employee feels underpaid, he can just go and get a better paying job somewhere else. This is becoming less and less possible in our technological era.

A normative measure of housing cost, apparel and clothing cost, food, utilities, and the basics is needed to define a minimal wage and then a decent wage or fair wage. In essence, the wage when defined puts constraints on the employee. One movie theatre visit per month or a new pair of shoes every six months, or a TV without cable and no internet access.

We have to define what a reasonable person should be expected to spend. So we, with this analysis and hence normative decent wage, constrain what the employee can do and spend.

Otherwise, we have what seems to now be true: people are spending over their limits and getting into credit card debt service at 24% interest which means they are paying off interest and no principal in the usual case today.

People spending "over their head" or "over their limits" is a problem. It's almost a moral problem with the rampant consumerism and ads on TV for this and that product wherein consumers are seduced into buying things they don't really need. Does someone need an iPOD ?

Many economic models try to address this, as well as the money supply (M1, M2, etc) from the US Federal Reserve. Yes, even this is intertwined with a "fair wage" position.

So I think all people should be paid a "fair wage" for their work.

What happens when the companies, which are now huge multi-national if not supra-national (beyond any local or country accountability) decide that the labor pool just simply is costing too much in a factory in Massachusetts and move production to India ? Or Vietnam ? Or China ? What happens to those workers in America who lose their jobs to the "bottom line" accounting thinking of pure profit ? Are they supposed to give up their SUVs or iPODS or cable TV to accept an impossibly low wage so the jobs can stay in the country ? We just

cannot compete with India or China in a bottom line way. The labor pool is just cheaper -- significantly cheaper.

So when the jobs are lost to China, a factory worker, if he's lucky, winds up with a minimum wage job at a supermarket or CVS. If he's unlucky, he doesn't get another job. Companies no longer care. This is a huge societal change from decades ago.

We must also look at the socio-economics of classes in society. The "just out of college" sector is different than the older population and then the older sector. It follows a normal distribution almost. The people just out of college require less, the mature workers require more because they have a family to support and they are generally stuck in their jobs and have little mobility, and then there's

the older sector which also includes retired people which requires

little too, except medical expenses.

The middle sector seems to define the true index if we factor out psychological temptations of escalating consumerism.

However, with jobs being shipped overseas, even that sector is being affected now.

The "Cost of Living Index" is something to look at for normative living costs per region.

This is an interesting question, steeped in the most profound psychological and economic theories, and although it seems intuitively obvious what a fair and decent wage is, it remains elusive as a normative value. Adam Smith knew. That's why he started with the making of a pin.

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1. The Bureau of Labor Statistics

http://www.bls.gov/

2. In Wikipedia

http://en.wikipedia.org/wiki/Cost_of_living

http://en.wikipedia.org/wiki/Standard_of_living

http://en.wikipedia.org/wiki/Standard_of_living_in_the_United_States

http://en.wikipedia.org/wiki/Minimum_wage

3. Mercer Report on Cost of Living Worldwide

http://www.mercer.com/referencecontent.jhtml?idC..1268475

http://www.mercer.com/costofliving

4. ACCRA Cost of Living Index comparisons

http://www.coli.org/

5. CNN Cost of Living Comparator

http://cgi.money.cnn.com/tools/costofliving/costofliving.html

6. InfoPlease Cost of Living Comparsion

http://www.infoplease.com/ipa/A0883960.html

7. US Department of Labor, Bureau of Labor Statistics, Consumer Price Index

http://www.bls.gov/cpi/

8. University of Michigan Library Cost of Living resources

http://www.lib.umich.edu/govdocs/steccpi.html

9. US DOL, BLS question on CPI a cost of living index ?

http://www.bls.gov/dolfaq/bls_ques2.htm

10. Fair Market Rents -- 2008 projected

http://www.universallivingwage.org/fy2008fmr.htm

11. Standard for Calculating a Fair Wage - Texas A&M University

http://jpi.tamu.edu/LivingWage/LWIStandardsforCalculatingaLivingWage.pdf

12. "A Fair Wage ?" - National Council on Economic Education

http://www.econedlink.org/lessons/index.cfm?page=teacher&lesson=EM203

13. ACORN - Living Wage website (perhaps biased)

http://www.livingwagecampaign.org/

14. The Economic Policy Institute - Living Wage

http://www.epinet.org/content.cfm/issueguides_livingwage_livingwage

15 "What is a Living Wage?" - Jon Gertner, The New York Times, January 15, 2006

http://www.nytimes.com/2006/01/15/magazine/15wage.html