The Living Wage Argument Gets More Attention After Obama's Minimum Wage Proposal

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Reece Freeman, of, introduces why a "Living Wage" makes more sense than "Minimum Wage" for small businesses after President Obama's call to raise the minimum wage to $9 an hour.

Income inequality in America

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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 minimum wage from $7.25 to $9.00 per hour and tie this wage to the national average cost of living. This relates to 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 earn more than the federal poverty level. This fairly liberal concept, called the “living wage standard,” has been around since the mid-1990s and has since been adopted by several municipalities across the nation with mostly positive results. This report by the Gotham Gazette details this in a study on New York's own experience. 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 not perfectly competitive since employers almost always have the upper-hand because of “frictions” in the market associated with changing jobs; such as the cost of searching for a new job. The minimum wage in most cases counterbalances this inequality, ensuring that extortion in the market does not occur, as shown in this report by the economist.

The right’s opposition to the increase in the current minimum wage in the form of a living wage is founded in more sensible economics. One argument, by news organization, Fox Business, is that raising the minimum wage increases unemployment and inflation leading to stagflation as seen in the mid-1970s. This is because increasing the 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 aisle point to the late 1990s where the minimum wage was low and so was both inflation and unemployment; 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 living wage such as a decrease in poverty, a decrease in overall inequality, lower taxes on businesses due to greater operating costs, and an increase in consumption. This bump in consumption is due to higher wages at the lower income levels which are comprised of people with a greater propensity to spend income rather than store it away in tax shelters.

Proponents also point out that even in the high unemployment and stagflation of the 1970s the majority of 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 both large and small businesses would need to adjust prices in order to maintain current profit expectations. But this is where the administration’s proposal fails the economic litmus test. If we tie the living wage to the price level, and prices increase in order for businesses to make ends meet, one can easily imagine a scenario 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 always increase with economic growth, like in the 90s, this would not only help the lowest wage earners reap the 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 made the point that if the U.S. had implemented similar wage standards in 1968, the current minimum wage would be above $20 an hour and economic inequality would be at much more reasonable levels.

More Information on Reece Freeman and
Reece is a research analyst, content specialist and editor at When he's not honing his Googling prowess and blogging skills, he's keeping up with the latest in small business and technology news from around the country. Reece is also a moderator and major contributor to ChooseWhat's small business forums; lending his knowledge of the tech industry as well as SaaS expertise to the world at large.

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