A Living Wage is Impossible

Recently the idea of a “living wage” has come to the for with the “Fight for 15” campaign. The living wage has been a popular idea in the left for a while. I don’t plan on on showing how a “living wage” it will increase unemployment or hurt economic growth, you can find that stuff elsewhere. Rather I am going to show you how a living wage is impossible; it is simply not something that can exist given our present society.

As I have pointed out before, housing is the single largest expense in most households (other than possibly taxes) and is effectively a positional good. (Read the link for the full argument). Americans spend about a third of their income on housing, a number which has been increasing over time. As people become richer, they tend to spend more absolute money to obtain larger houses keeping proportionate housing expenditures at similar or even higher amounts. Housing costs as a proportion of income do not decrease as incomes rise on a societal level.

If you increase the minimum wage, people on minimum wage will spend more on housing as competition for housing increases deu to its status as a largely positional good. This will drive the costs of housing up. After a time of correction, housing costs will have increased in absolute terms but have stayed roughly the same relative to income. There will be no real improvement in the housing situation of most people.

The next big expense for homes with children and working parents is childcare. I’ve already explained why child care will always be unaffordable; essentially, given child care worker to child ratios, a minimum of a quarter of one person’s income is necessary per child for child care. If you raise the minimum wage you simply increase child care costs proportionately.

Finally, the costs of all other goods will increase as well. If you pay minimum wage workers more, the price of all goods will increase across the board, raising the cost of living, particularly for the poor who depend the most on low-cost goods.

Increasing the minimum wage will create minimal improvements for poor families receiving minimum wage (they may create moderate improvement for poor singles who don’t have child care costs and have lower housing needs) because the increased costs of good and services, particularly housing and childcare, will eat away any gains from the higher nominal wages.

A living wage is impossible for this reason; increases in the minimum wage will simply inflate the value of goods proportionately, so there are minimal real agins for the impovershed.

(This of course ignores the impact on the middle class; who will be greatly damaged by a “living wage” as the costs of goods and services increase while wages stagnate).


15 responses to “A Living Wage is Impossible

  • A Northern Observer

    We’ve already seen this with housing prices – when both spouses income could be considered for a mortgage application, they could afford higher prices, and housing prices rose relative to this new money such that, instead of two incomes being nice, it became a near _requirement_ in order to afford a house. It was no longer a choice. “A living wage””ll do the same. It’ll also price entry-level / teens / young people out of the market, because no-one will want to pay someone with no experience that kind of $$.

  • jeff

    That government report is BS. Healthcare is just 5% of your typical household budget, WTF!! If you take into account how much your employer pays (as it is lost income that would have gone to you), healthcare is a huge part. Also, those damn government statistics stated that healthcare costs rose just 4% in 2013 (source http://www.nytimes.com/2013/08/21/business/survey-finds-modest-rise-in-health-insurance-premiums). Anybody in red pill land believe that? My premium for family coverage went up about 35% in 2013 and went up 45% in 2014.

  • Red

    The price of housing is largely dictated on much it costs to stay away from section 8 renters. The increase in housing size was partially about driving up the price of houses in a given area make it impossible for a section 8 renter to price in. The problem with this inflation is it’s harder and harder to raise a family on one income and that’s something a living wage would probably make even worse.

  • Wilson

    Probably works out well for the government in terms of increased tax collections.

  • Handle

    The progressive economists are fully aware of this problem and have been for a long time. When you make mild distortions to the general equilibrium, like placing a price floor on certain kinds of labor, there is bound to a ripple effects of adjustments in quantity demanded away from those inputs, and good the price of which is heavily dependent on them, and towards alternative substitutes.

    And, as you say, the few individuals who kept their jobs and got pay raises will tend to use that extra money to bid up the price of the things they want to consume, like housing in better quality neighborhoods. Then again, higher wages mean less public assistance, so the overall effect is not very large.

    So, because of this effect, and the nightmarish experience with poverty-concentrating public housing projects, the progressives now strongly support the policy of poverty dilution and integration into richer neighborhoods with more resources and better schools.

    Since Section-8 vouchers will never be generous enough to pay for rent in the nicer neighborhoods in a city, HUD’s latest general strategy is to insist on ‘affordable housing’ initiatives where all new nice neighborhoods in certain areas will need some cheap set-asides that can only be used by poor, Section-8 recipients at lower-than-market-value prices. A great example of this is the recent settlement between DOJ and HUD and Westchester County (NYC metro) that requires precisely this kind of outcome.

    There has been plenty of abused of this system when the covenants weren’t air tight, and political allies of the right complexion were given full ownership of properties below market value and then sold them off for a windfall profit later.

    So, like Hayek predicted, the progressives try to compensate for one market distortion – wages – with another market distortion – restrictions on the use, value, and rights to possession of real estate.

    Of course, they don’t need higher minimum wages to do this, they could just pay for all the subsidy and deadweight loss out of general taxation. But it’s always easier to hide taxes in laws that redistribute obscurely and internally from one group – employers and customers – to another – minimum wage employees. That’s how Obamacare works too with its price controls on premiums.

  • Tim

    If minimum wages helped the poor, then why were there always lots of poor after each of the previous increases in the minimum wage?

  • Aquinas Dad

    More critically, a living wage for all jobs is unjust.
    Work with me.
    ‘Justice’ means ‘giving when people deserve/ow’. This means there can, indeed, be an argument that some CEO’s are overpaid – we can demonstrate that Carly Fiorina did NOT add her salary in value to HP, for example. When you add in that more competent people were available for the position for less it can be argued that her salary and perks were ‘unjust’.
    A guy working at Burger Queen 30 hours a week flipping burgers is doing decent, honest labor. He deserves praise (he’s earning a wage and getting work experience) but what he is doing is not adding $15/hour value to the store.
    “But Aquinas Dad!”, I hear the cry of the social justice major, “It is unjust for a man to work hard and not be able to feed himself and his family!”
    And I reply, “Not so, SJM. Such positions are meant to be introductory or transitory. It is part and parcel of the nature of the job, as is well understood. Without introductory positions young workers cannot learn basic skills. Without transitional positions people changing locations or careers cannot do so without great pain. A young man who works at Burger Queen part time during the school year and full time Summers while still in high school has that formerly-not-elusive ‘2 years of work experience’ so common on a list of requirements to apply for a job that DOES pay a living wage. These low-end jobs are the apprenticeships of the modern world.”

  • Marty Andrade

    Reblogged this on The Andrade Archive.

  • Gustavo Schultz

    Forgive me, I do not speak English, I use the G-translator and fully agree with you, just look at my country, Brazil. The politics of the minimum wage inhibits the recruitment of less qualified and / or less experienced (younger) people because hiring them would create prejudice to the holder would be required to pay more than worth the manpower hence poverty. As a result, many turn to crime, while others resort to government handouts, then, populism. I’m not sure could not understand what I said, but the only way to increase wages is worthily increasing productivity.

    Economics in one lesson: http://goo.gl/4fBlm

  • Ton

    Given the ever increasing IQ requirements to earn a “living wage”, the reduction in total volume of human labor needed to produce goods and services and how most folks are on the wrong side of the bell curve some sort of minimum income guarantee is going to be required. That or we start culling the herd.

    I’d rather see the West become less.civilized, more tribal etc but I don’t foresee that happening any time soon.

  • Free Northerner

    @ Red and Handle: Public housing (which I assume is what Section 8 refers to) has its own set of problems; that’s a nice summary of them Handle.

    @ AD: When a leftist uses a catch-phrase, you can always tell they mean the exact opposite of what they say.

    @ Ton: I’d say the West become properly civilized. What we have is definitely not more civilized than honest tribalism.

  • Ton

    lol, well said Free

  • ibti

    single motherhood should be severely disincentivised by removing rights to child maintenance or welfare for children conceived out of wedlock..benefits instead paid to married couples with children…unskilled jobs should be reserved for men…no sense in outsourcing childcare in order to earn minimum wage…wages will go up as labour supply drops…as brazilian poster mentioned, marginalisation of unskilled men leads to criminality

  • oogenhand

    Reblogged this on oogenhand and commented:
    Nice economic riddle…

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