Introduction:
It is commonplace during election campaigns in the United States to see the Democrats pushing hard to raise the minimum wage. They continually claim that the minimum wage is too low for a family to live on and therefore it should be raised, usually by a large percentage.
Meanwhile, their opponents, Republicans for the most part, oppose such increases on the grounds that raising the minimum wage actually hurts the poor by forcing employers of low skilled jobs to hire fewer workers and/or to lay off a portion of their workforce to compensate for increased labour costs. Thus, they claim, while raising the minimum wage might aid individual workers (i.e. those who are not laid off) overall it hurts the very sector of the populace it was meant to help.
In reality, both sides are wrong. Raising the minimum wage actually accomplishes exactly nothing over the long term.
One thing people often lose sight of is that a dollar is merely a unit of measurement. Physically, a dollar is basically a piece of paper with some pretty green engraving printed upon it. It has no inherent worth of its own, aside from its use as a piece of scrap paper, and even that is dubious since there is very little white space upon which to write.
The actual value of a dollar comes from its use as a measurement. All money is really simply a measurement. Just like an inch or a mile or a pound or a decibel. Think for a moment about the concept of an "inch". Can you hold an inch? Can you see an inch? Can you pick up an inch and put it inside a jar and stare at it? No. You can of course, hold an inch of something. You can see an inch of something. You can even pick up an inch of something and put it into a jar to look at, but it always has to be an inch of something. The actual inch itself does not exist except as a frame of reference for measuring some length of something else.
That, then, is the key to the principle of money. Money, being a measurement, is measuring something. What is that something? Quite simply, it measures the value society places on a thing, whether that thing is a task, an object, or a prospect. It is very important to keep this fact in mind when thinking about the minimum wage, because in essence what is being proposed when someone wants to raise the minimum wage is akin to someone proposing that a mile be half as long as before.
What would happen if some authority on high suddenly decreed that starting January 1, 2003, a mile would be half as long as it was before. Furthermore, this same authority decreed that a pound is half as heavy as it was before. Would everything suddenly get twice as long? Would everyone suddenly be twice as heavy? Numerically yes. But physically? If I were a 6' tall male weighing a slim 150 pounds before the decree, would my change to 300 pounds suddenly make me fat and incapable of performing the physical feats I could perform prior to the edict? Of course not! I'd be in the same exact shape I was before. Similarly, if a mile were shortened to half its previous length, my drive to work would change from 15 miles to 30 miles. But has the length of the drive really increased? Would it now take me twice as long to drive to work?
The same concept holds true with money. Raising or lowering the minimum wage is akin to shortening a mile. Only numbers change, not reality. This is empirically evidenced by the fact that the minimum wage has steadily increased throughout the 20th century in the U.S., yet it still remains the minimum wage. In 1938 the minimum wage was 25 cents an hour. As of December 31, 2002 the Federal Minimum Wage was $5.15 per hour. Are the minimum wage earners in 2002 really over 20 times richer or better off than the minimum wage earners in 1938?
Obviously not. And I am sure you have the answer on the tip of your tongue. Inflation. Indeed, inflation has made the $5.15 minimum wage earned today comparable to the 25 cent per hour wage of 1938. And because of that, it is easy for people to backwards think and put the cart before the horse. The common misbelief here is that the minimum wage has to be raised to keep up with inflation.
But what is inflation?:
In the 1930's the German Weimar Republic went through an immense economic upheaval. Aggravated by Communist revolutions, the onerous Treaty of Versailles, and the worldwide depression, prices in Germany skyrocketed. I have postage stamps from Germany both before and during this period of hyperinflation. The stamps before the inflation are approximately 1 mark for a letter. The stamps during the hyperinflation top 1,000,000 marks for the same letter! What happened to cause that? Where the stamps suddenly made of gold and encrusted with diamonds? Were the German post offices so filthy rich from collecting 1,000,000 marks per letter that every German postal worker sailed around in a private yacht?
No. What happened was, essentially, that economic events started to make the government short of funds, and just like shortening a mile, the German Government sought to keep up by printing more money. Printing more money is akin to shortening the mile. The number of miles you drive to work gets larger, but the distance remains the same.
Inflation does not just happen. In fact, like money, inflation is merely a measurement. It is, in essence, a measurement of a measurement. There is nothing inherent in the nature of a dollar that causes its value to degrade over time. A dollar is not like a piece of radioactive material that emits radiation and loses its potency over a period of time. Inflation is not inevitable, despite the historical example in the US of prices increasing over time. In fact, if you think hard enough you can come up with many examples of prices that have decreased over time. Computers and calculators are good examples. When I was a child in the mid 1970's, you could pay upwards of $100 dollars for a calculator that did little more than add or subtract. These days, businesses give away calculators free as promotions!
Inflation is caused by events. Real events happening in the real world. These events cause inflation and thereby devalue the dollar.
However, this is not a lesson on inflation, so while you keep in mind that inflation is not inevitable in and of itself, but is caused by outside factors, let us refocus on the minimum wage.
The Grand Experiment:
One of the best ways to test a notion is to take it to an absurd extreme and observe what happens. Often, changes are too subtle or take too long for us to observe them. Yet, they do occur and, over time, can be substantial. By testing an extreme, we can observe the same forces that are at work in real life examples.
Assume that on January 1 of the current year, the social progressives won a massive victory and suddenly, drunk with power, decreed that the minimum wage in the US was hereby raised to $100 per hour. "Everybody gets to be rich today!" they would tout. "No more poor in America!" they would jubilate. And they'd be right wouldn't they? $100 per hour is a fine wage…anyone could live more than comfortably on such a wage. It'd wipe poverty off of the face of the map wouldn't it?
Would that it were so easy.
Let's think what would happen after the edict.
First, let's look at the hypothetical me. I am a professional, intelligent, well-educated person. I went to college. I have developed highly trained skills that are not easily duplicated. I am, in fact, one of the best at what I do in my field. I have a great head for business and am a CPA to boot. The first thing that would happen in our pretend world is that I would now look around and see teen-agers flipping burgers at Burger King making more per hour than me. Of course, my own wage, which is currently far below $100 per hour, would also be raised to the minimum level. But still, it would end up that my wage is the same as the teen-agers. I wouldn't stand for that. After all, anyone can flip a burger, but I studied hard in college to get where I am. I have worked for almost 20 years in my field and I am very good at what I do. I studied and passed the CPA exam as well. Certainly, all my abilities and sacrifices merit me more than a burger flipper! In addition, my job currently is stressful. I have a lot of responsibilities. I have to drive a long commute to get to my work. And I work long hours. Why should I even bother working at my current job if I could go veg-out at a burger place with no more cares in the world and normal hours and no stress and still make $100 per hour? No siree! I would march right into my boss' office and demand an immediate raise to $500 per hour or I quit.
You have to pay trained professionals more than janitors and burger-flippers. Why? Because otherwise why would anyone ever have the motivation to put in all the hard work necessary to rise to such a professional station? Why would I spend 4 years in business school, spending thousands of dollars on student loans, when I could bum around and party for those same 4 years and then get a brainless job for the same $100 per hour?
Remember, money is a measurement. It measures how society values tasks. Society values doctors more than janitors. Therefore, it pays them more. Does that mean janitors are horrible shameful people? No. Does it mean they are less than human? No. But it does recognize that fewer people are capable of becoming doctors and fewer still have the dedication to actually pass medical school and internship and become a doctor. The requirement to be a janitor is basically being able to walk upright on two legs and push a broom. Almost anyone can do that, and it doesn't require schooling or much intelligence.
But skilled workers demanding raises is just part of the equation. What else would happen after our Socialist utopia goes into effect?
Well, next, the cost of things would increase. After all, let's take a walk down to Burger King. Burger King is suddenly paying its burger flippers $100 per hour. How much do you think a hamburger is going to cost to make the company a profit? Welcome to Burger King sir. You'd like a hamburger, fries, and a Coke? That'll be $157.36.
Not only does the cost go up though. Let's look at the proprietor of a corner market. He is not subject to minimum wage laws because he is not an employee. Let's say he runs the shop by himself even, so he doesn't have any $100 per hour employees to pay. Will he still raise his prices? Of course! Why? Well Mr. Shopkeeper, who was, before the change, pulling in a take home profit of $35,000 per year now sees even the lowliest paid workers bringing home a wage of $200,000 per year. Why should he make only $35,000 per year when everyone around him is raking it in? So he raises his prices to compensate...so that he pulls in at least $200,000 per year and more likely much more than that. Lettuce…on sale today at $20 per head!
Even passive investments will react. Mr. Landlord owns a 1-bedroom apartment that he rents to a tenant. He used to charge rent at $650 per month. But now his tenant is loaded. Why should the tenant sit on a mound of money while I still only get $650 per month, he thinks. And so he raises the rent to $13,000 per month.
And what you have, ladies and gentlemen, is inflation.
And suddenly, in a short period of time after the Socialist paradise has been erected, it comes crashing down. And now those selfsame $100 per hour minimum wagers, who are now paying $95 for a burger, $13,000 per month for an apartment, and $20 for a head of lettuce are just as poor as they were before.
Imagine the wage structure of the economy has a big human pyramid, like you sometimes see gymnasts and cheerleaders form. Now lets say the people on the bottom of the pyramid feel they are too far from the top. So they request that a 10' tall platform be placed under their feet. They step up on the platform and…lo and behold…they are still just as far from the top as before, because when they raised themselves up atop that platform, they carried the rest of the human pyramid with them.
Raising the minimum wage accomplishes NOTHING. It never has and never will. Money is merely a measurement, and since society still values low skilled work lowly, it will always pay it lowly. That's money…and that's life. The ONLY way raising a minimum wage can ever really give the bottom economic rung more actual spending power is if the top rungs are artificially stopped from rising up with the lower rungs, and the only way to practically do that is to either tax the wealthy or to freeze prices. Both of these practices are sometimes engaged in by the government to various extents, but even they merely blunt or redirect that upward flow. The fact is, over the last 75 years, while the minimum wage has increased over 20 fold; the real buying power of the minimum wage has remained almost at the 1938 levels.
So why does the minimum wage get raised so often if it accomplishes nothing? Well, next time an increase to the minimum wage is proposed and starts heating up in the news, whether a state wage or Federal, take a glance at the calendar. My bet is an election won't be too far off. You see, the poor tend to also be the less sophisticated economically. They don't tend to understand the various things I have written about above. They tend to think that a dollar is an actual living and breathing thing and that to have more of the little green pieces of paper automatically means one can buy more of everything. Alas, all they really have are more little green pieces of paper.
But, in the meantime, the unscrupulous candidates looking for cheap lower income votes can tout a raise in the minimum wage. After all, what's a minimum wage earning janitor supposed to think when someone offers to double his income over night? And raising the minimum wage does indeed increase the buying power of the poor for a short time period…long enough for the rest of the economy to adjust in the ways I have already described. So, you might ask, what's the harm then?
Well, raising the minimum wage causes inflation. And inflation makes money less valuable. This means it makes money sitting in bank accounts and retirement funds less valuable.
Let's say you have $200,000 in a retirement fund today. That's a decent nest egg. Let's say the next day our Socialist utopia was enacted. Suddenly, your retirement nest egg isn't so much is it? When burgers start costing $95 and houses cost in the millions of dollars even for the smallest of homes that nest egg will seem the size of a real egg!
A Living Wage:
So, once we accept the premise that we are basically stuck with the minimum wage we have, no matter how many zeros you might tack onto it, the question becomes, can people live on it?
I constantly hear people decrying the fact that a family cannot live on the minimum wage. This cry and hue is especially shrill in California, where I live, and we even have a state minimum wage far above the Federal. The California minimum wage, as of December 31, 2002, is $6.75 per hour.
I intend, in this section, to put to rest once and for all the idea that a family cannot survive on the minimum wage.
Now first, I want to make some things clear. First, the minimum wage is not designed to have you living luxuriously. In fact, it is not designed to have you living well. No one should ever aspire to the minimum wage, and no one should ever be content earning it. It is, after all, the barest minimum society offers. And although it can be quite enjoyable for a teen-ager to earn minimum wage while he is being supported by his parents, as a primary means of support, minimum wage should, by definition, be enough to keep a family in secure shelter, fed, and clothed. That's it. It is not and should not be designed to impart the American dream to the family. It is not designed to allow such a family a car and cable TV and a computer and the ability to eat out once a week and the ability to go to Disneyland every year. Those are luxuries. If you want those things you must go out and become skilled and earn them. All the minimum wage is meant to supply is basically the basic necessities of life enough so that you or your children can one day better yourselves and rise above the minimum wage level.
In addition, even I do not purport that the minimum wage is sufficient for what I will call extreme family units. Will the minimum wage support a family of 10 children? No. Will the minimum wage support a single parent with 2 children? No.
So what about those cases? If you do not have the skill and education to earn above minimum wage, don't have 10 children. If you do not have the skill level and education to earn above minimum wage and you cannot rely on your spouse to stick around and support you and your children, then do not have children. No minimum wage will ever practicably take care of all possible situations.
But, can a family of four, a husband, a wife, and two children, live on the minimum wage in California?
Let's find out.
The Family:
Meet our family…the Willakers. There are four members of the family, Ernest, 35 years old, the husband and father, Emily, 32 years old, the wife and mother, Esmerelda, the 8 year old daughter, and Elias the 3 year old son.
Ernest works full time. He does janitorial work at an office building for minimum wage. The job does not include any sort of health benefits.
Emily would like to work full time, but she cannot afford to, since the cost of daycare for her children would be too great. However, Emily knows of 4 other mothers like herself who would love to work and also need daycare. Emily and the other 4 mothers come to an arrangement. Each mother works 3 days per week. This means that on any given day of the week, 2 mothers are not working. The 2 mothers who do not work on a given day watch the children of all of the mothers. This means each off-day mother is in charge of 5 children for the day (though the older children spend most of the day at school). On her 3 days per week that she works, Emily works at a fast food restaurant. She gets no discount on food from her job and is provided with no health benefits.
Income:
Ernest works 40 hours/week at a wage of $6.75 per hour. His gross weekly take home pay is $270.00. His yearly income is $270.00 x 52 = $14,040. His monthly pay is therefore $14,040 divided by 12 = $1,170.00.
Emily works 24 hours/week at a wage of $6.75 per hour. Her gross weekly take home pay is $162.00. Her yearly income is $162.00 x 52 = $8,424. Her monthly pay is therefore $8,424 divided by 12 = $702.00.
The family's monthly gross income is $1,872.00.
Taxes:
Taxes are assessed as follows:
FICA (7.65%) = $143.21
SDI (0.9%) = $16.85
The Willakers will owe no Federal income taxes. In fact, they qualify for the EIC and Child Tax Credit to the extent that even though they paid no Federal Income taxes, they will receive a check from the IRS for $3,404. You can view their tax return here. You can view their form 8812 child credit calculation here.
The Willakers will owe no California income taxes. You can view their tax return here.
Total taxes assessed during the year to the Willakers are $1,920.72. This is countered by a refund from the IRS of $3,404.00. This means the Willakers will gain $1,483.28 to their yearly income from taxes.
Take Home Pay:
So, the Willaker's monthly take-home pay is $1,872.00 from wages, plus one-twelfth of their net tax refund of $1,483.28. This means every month the Willakers have $1,995.61 to spend.
Shelter:
First the Willakers need shelter. A search on January 29, 2003 at www.apartment.com showed a nice 1 bedroom apartment in the Mid-Wilshire area of Los Angeles (for those of you living outside LA, Mid-Wilshire is by no means a ghetto or a blighted area. It is ethnically diverse and skews towards lower middle class) for $750 per month. The apartment includes:
Central Air Conditioning
Gas Fireplace
Dishwasher
Separate Eat-in Kitchen
Gas Range
Garbage Disposal
1 Bathroom (with combo bath and shower)
1 Bedroom
Carpeting
Ceiling Fan
Water and garbage collection are included in the price of rent.
Here is the outside of the building.
As you can see, it is clean and modern. There are other apartments in the same area that run the same price.
For verification purposes,
the building in question is the Crenshaw Townhouse Apartments
at 1327-1329 S. Crenshaw Blvd.
Subtracting monthly rent from monthly take-home pay, the Willakers
have $1,246 left to spend.
Food:
According to the USDA website at :
http://www.usda.gov/cnpp/FoodPlans/Updates/fooddec02.pdf
The monthly cost of food for a family of four (including 2 children) utilizing the "thrifty" food plan is approximately $450. The Thrifty Food Plan is a guideline of minimal cost foods prepared at home that provide the necessary nutritional value to those consuming the diet recommended by the plan. It is used to develop food stamp schemas.
You can learn more about what constitutes the Thrifty Food Plan at:
http://www.usda.gov/cnpp/FoodPlans/TFP99/TFP99ExecSumm.PDF
After paying for food, the Willakers have $796 left.
Medical:
Neither of the Willaker's jobs provide health insurance (the cads!). So the poor Willakers have to get it themselves.
Using First Health Plans at:
http://www.1sthealthplans.com/
I searched all of the providers in California for a plan using the Willakers' demographic information (i.e. gender and age).
The Willakers can get an HMO package from Healthnet (called the HM40 plan) that has the following features:
Office visits: $40
Hospital Co-pay - none
Deductible - none
Maternity - $2000 deductible.
Since the Willakers do not plan on having any further children, the maternity deductible is not a problem. The monthly cost for this plan is $439 and covers the entire family.
For dental coverage, using the same website, the Willakers can enjoy Golden West's Smile Choice 100 plan for $12.50 per month. This coverage has no deductible, no charge for routine visits, and moderate charges for other work. They have providers throughout Southern California, including locations near the Willakers.
After paying for medical and dental coverage, the Willakers have $344.50 left.
Travel and Transportation:
Living in the middle of Los Angeles, the Willakers can certainly take a bus or ride bicycles to their jobs. There are literally tons of buildings and fast food franchises within walking distance of their apartment and even more of the same in biking distance.
A monthly regional EZ bus pass (good for all bus and train routes within greater Los Angeles County) is $58 per month.
After bus costs for each of Ernest and Emily and incidental bus costs of $25 per month for the children, the Willakers have $261.50 left to spend.
Um…Where's the Car?:
If the Willakers tried to insist on a car, it would be tough for them.
The Willakers can pick up a 1990 Toyota Cressida for $3,200 (per used car info at www.edmunds.com). Assuming they take the amount they have to spend on repairs, gas and insurance and initially save it for the purchase of the vehicle, they can have enough money to purchase the car in 9 months. Allowing for costs to take the bus or buy bicycles during this time, assume 10 months to afford a car.
Insurance for the Willakers amounts to $271.50 per month. This was calculated using the online quote system from 21st Century Insurance. I assumed the Willakers had no prior accidents or tickets and that this was the first auto insurance policy they ever held. This was also calculated using the recommended deductibles and coverage levels, which are well above minimum state requirements. For example, deductibles are at $500 when they could be raised to $1,000.
For gasoline, assuming 10 miles commute one-way (they carpool) and 10 miles per day on weekends, that comes to 120 miles per week or 6,240 miles per year. Assuming the Cressida gets 15 miles per gallon (very conservative) that's 416 gallons per year. At $1.50 per gallon, that comes to $624 per year or $52 per month.
As far as repairs go, Ernest should learn to be handy with a wrench and do much of his own auto repairs. Nonetheless, assume repairs and maintenance come to $50 per month.
Total automobile cost is $373.50.
As you can see, if the Willakers get a car, they are not going to have anything left, even if Ernest were really handy with the repairs and saved the $50 per month in repairs.
Other Costs:
The Willakers have to pay for utilities. Their water and sanitation is covered by their rent. Their telephone service runs $50 per month. Electricity runs another $50. Gas (they have a gas range in the apartment) runs $20.
The Willakers shop for clothes at thrift stores. Emily is very good at sewing up old clothes and the like. Clothing costs the family $15 per month (at a thrift store that can get you 1 pants, 1 shirts, and some shoes). Emily gives the children hair cuts. She and Ernest get cuts at Supercuts once every two month for $12 and $20 respectively.
The Willakers need to buy toiletries and sundry items from the grocery store. Emily clips coupons religiously and the family is careful not to waste anything. These sundries run them $50 per month.
After other costs, the Willakers have $60.50 left.
The Leftovers:
What do the Willakers do with the remaining $60.50?
They put $30 into a savings account for emergencies and rainy days.
They put $30.50 into a savings account for family money. This is for buying new appliances, going to an amusement park, or whatever.
Life with the Willakers:
So what is life like for the Willakers? It certainly is not luxurious. The Willakers have to constantly watch their money and certainly live from paycheck to paycheck. They cannot afford cable TV. They do not own a computer. They are very limited in their entertainment options.
The Willakers' family get togethers involve watching network free TV as a family. On Friday nights they break out the various boardgames like Monopoly or Parchesi they bought at the thrift store and have a family game night around the kitchen table. They get lots of used books for 25 cents from the neighbourhood bookstore and read voraciously. They also take picnics at the neighbourhood park (though only in the daytime). They also go bike riding.
The Willakers have to all share one bathroom, which takes some patience and managing. The children sleep on a pull out couch in the living room or in sleeping bags on the floor.
But, they live in a reasonable neighbourhood. They have a secure and clean apartment with amenities. They are fed and have good health coverage. They can travel around the city and have all standard utilities. They even have enough to save for a rainy day. They own a television….perhaps two.
While they are not living the modern American dream, they are safe, sheltered, and secure.
What Wasn't Included:
The Willakers would be, normally, eligible for food stamps. I didn't even bother with that. If the Willakers got food stamps, they might be able to afford the car.
(Addendum: Using a 2007 government tool on the web [the FNS page at http://65.216.150.143/fns/index.jsp], I calculate that the Willakers would be entitled to between $215 and $225 per month in food stamps. Assuming they got that, they could certainly afford a car if they turned in their bus passes and Ernest was handy with some car repairs and maintenance)
So Where are the Willakers?:
So, if it's so easy, why don't we see this in real life?
Well, the main reason is an unavoidable one. Those who are stuck at the bottom of the wage earning ladder are there for a reason. And usually the reason is that they tend to be less educated and, often, less intelligent than those making more money than they. Now, before anyone accuses me of calling all poor people "dumbies" or "idiots", that's not what I meant. But, by definition, the smarter a person is, the more likely he is to have excelled in school. And the better one performs in one's schooling, the less likely one is to end up 35 years old with 2 children in a minimum wage paying job!
Because of this, those making minimum wage are not usually capable of really enacting such a well-designed spending strategy as outlined above for the Willakers. Surviving at minimum wage level takes fiscal discipline, self-motivation, and foresight. These are just the qualities that generally keep people out of minimum wage situations in the first place!
In addition, the addition of more than 1 more child into the above equation can throw the family back into poverty. As can a single parent trying to make it on his own.
Finally, vice is not nice. If even one of the Willakers smokes, it's game over pal. A pack of cigarettes is so onerously taxed these days that even at 1 pack per day the Willakers would spend $122 per month on smokes. Add a beer per day to that and you basically almost double your food bill. Leave the smoking and drinking to those who can afford it.
The Single Parent Dilemma:
Single parents should not have children if they cannot afford them. People should not have children with anyone unless they feel they are able to rely on their spouse or partner to stick around.
Nonetheless, even the best intentioned parent can find himself single. Death of a spouse, divorce, etc can turn anyone into a single parent. So, what would happen to the Willakers if Ernest died in a car wreck?
The solution is that Emily would have to take in a roommate. Yep. A roommate. She'd have to find someone who would be willing to share the one-bedroom apartment (double beds of course) and food costs. Obviously, this is not the most ideal of situations, but presumably a family member or close friend could be induced to share the apartment. If not, then perhaps a roommate matching service would be needed.
Conclusions:
So, what conclusions can be drawn from this essay?
1. Raising the minimum wage accomplishes nothing, because the rest of the economy adjusts accordingly
2. It is quite possible to live on the current minimum wage if you are disciplined and set your expectations at the proper level
If you have any questions or comments on the above, feel free to contact me at devincutler@yahoo.com.