Living Wage Gives a Boost to Demand

Amid the celebrations over the economy’s current performance, the New York Times recently reported more sobering news: a dramatic rise throughout the country of families who rely on soup kitchens and food pantries to sustain themselves. Perhaps most disturbing in the report was that nearly 40% of the households using the country’s largest private network of food charities included at least one person who was employed.

Why would employed workers take their families to soup kitchens to eat? The basic cause is clear: Working people earning the legal minimum wage do not bring home enough money to support a family above the poverty line. A family of three with one worker earning the national minimum of $5.15 an hour would have an annual income 30% below the official national poverty line.

Beginning in Baltimore in 1994, a modern living wage movement has spread throughout the country to protest this situation. Living wage ordinances that set higher local minimum wage standards for workers employed by firms holding city contracts have passed in 19 cities, including Los Angeles, San Jose, New York, Chicago, Boston and Milwaukee. Organizing efforts are pressing forward in 24 other places, including Los Angeles County, Santa Monica, San Francisco, New Orleans, Philadelphia, and Manhattan, Kan. Though the stipulations vary, the basic common factor is that eligible workers earn at least $7.50 an hour, which, for a full-time worker, would generate enough income to keep a family of three just above the poverty line.

Should the living wage idea be broadened beyond city-contracting firms alone, including setting a $7.50 standard for a national minimum wage? This is hardly an implausible idea. Indeed, in 1968, the minimum wage was $7.50 (in today’s dollars) in a period when the economy was 50% less productive than it is today.

But opponents claim that such measures are harmful to the economy, and even to the very poor working people they intend to help. A higher minimum wage, they argue, increases unemployment, since the laws of supply and demand tell us that when you raise the price of anything (like low-wage labor), demand must fall (businesses hire fewer low-wage workers). But this law holds only when everything else is assumed constant, and it is far more plausible that things are likely to change with a minimum-wage increase, some of which will have a significant impact on jobs.

The most important factor is that when demand for products is high, businesses will normally push hard to meet that demand. They will not lay off workers or stop hiring, regardless of whether minimum wages are rising. For example, because demand was expanding strongly in 1997 when the minimum wage was last increased, the hike did not affect the unemployment rate. In addition, a national poll found that only 6% of small business owners changed their hiring or employment practices at all after the 1997 wage increase. By the same token, it follows that jobs will dry up when demand for products is falling, as happens in a recession, regardless of what recent changes have been in minimum wages.

Another consideration is that workers give more effort when they are paid decently. A higher minimum wage should therefore mean lower absenteeism and turnover, helping firms to compete in local, national, as well as global markets, on the basis of higher productivity and better product quality. Surely this is a more desirable route for promoting competitiveness than ratcheting downward the living standards of low-wage workers to where they increasingly resemble Third World economies.

It is undeniable that higher minimum wage requirements entail an interference in the market. But because market economies are dominated by greed and competition, they can survive over a sustained period of time only if they are buttressed by social institutions that support our inclinations toward solidarity and mutual respect. Living wage laws are one such supportive institution and soup kitchens are another. Do we want higher minimum wages or more working people bringing their families to soup kitchens? This is the basic issue at stake as living wage principles are debated around the country.