Living Wage

By Jim Keller

Everyone should be able to earn a living wage. But every time we raise the minimum wage, we make the situation worse. I have a better solution.

Obviously, a dollar is worth less today than it was in 1916.

Let's say I walk into a grocery store with $6.75 today. I can probably pick up a gallon of milk, a dozen eggs, and a loaf of bread with what I've got in my pocket. (OK, I spend more than that, because I shop at a high-end, union grocery store and I buy cage-free eggs and whole grain breads, but that's not the issue.) So, the buying power of one hour's wages is a gallon of milk, a dozen eggs, and a loaf of bread.

When the value of the dollar goes down like it did from 1916 to today, we have inflation. In an inflation, the buying power of an hour's wages go down. For example, if the price of bread, milk, and eggs doubles, it now takes two hours' wages to buy them, and your buying power is cut in half.

Ultimately, if you're worried about how to pay your bills, it doesn't matter whether you're earning $0.16/hour in 1916 or $6.75 in 2006, your real concern is how much buying power you have.

Raising the minimum wage to $100/hour does no good if the cost of a loaf of bread is $200. Even though you'd be earning wages that by today's standards would put you in the top 2% of wage earners, your buying power would be extremely low.

So, rather than limiting this discussion to where the minimum wage should be set, let's focus on all the ways we can improve your buying power.

The most common approach to trying to achieve a living wage for everyone is to raise the minimum wage. The problem with this approach is that it doesn't actually work, and it usually ends up making the situation worse.

You see, when minimum wage goes up, it costs employers more to hire employees. This increases the cost of producing goods. The higher costs get passed on to consumers and that causes inflation. Pretty soon the buying power or an hour's work ends up right back where it was before minimum wage was raised.

But, employers need to cut costs to keep themselves financially solvent, so they have probably laid off workers or deferred hiring new workers, causing higher unemployment.

And, remember that only about 5% of people who earn minimum wage are actually trying to support a family on those wages. (The majority of minimum wage workers are teenagers and young adults who still live with their parents.) Most of the working poor are already earning more than minimum wage.

So, let's say you're one of those slightly-above-minimum-wage working people, say earning $7.75/hour. We raise minimum wage to $8.75/hour. What do you think your new pay rate will be? Well, for most people, it will be $8.75/hour - the new minimum wage - even though to keep up with the inflation the new minimum wage causes, you'd need to be earning more like $10/hour. Raising the minimum wage puts more workers into the minimum-wage trap.

In other words, raising minimum wage hurts the very people it's supposed to help. I'm not one of those politicians who wants to do the wrong thing to look like I care. I want to actually help the working poor. So, how do we do that?

Well, there are two ways for you to have more money at the end of the week: earn more and spend less.

But, wait, we just said raising the minimum wage doesn't work, so that knocks out earning more, right?

No. There's a smarter way to help you earn more.

Let's pretend for a minute that there's no income tax. How much of the money that your employer budgets to pay you do you think is taken out by Federal taxes? About 15%. Without income taxes! Then, even if you're in the bottom tax bracket (which puts you way below the poverty line), income taxes are another 10%. Then there's state and local taxes, and sales tax, and gas tax, and... well, you get the idea. Conservative estimates say that an average Californian pays about 30% of their income in taxes -- whether they're rich or poor.

So, what if we reduce taxes?

Well, if we reduce taxes, that doesn't cost an employer any more money (and may even cost them less if we simplify the tax code to the point where they don't need a team of accountants just to do payroll). No new costs to pass along to consumers. No need to fire anyone. You would bring home more money.

There are several ways to reduce taxes. Working with the existing tax code we could expand the earned income tax credit, or dramatically increase the size of the personal deduction. Alternately, we could also completely restructure and simplify the entire tax code (saving the Federal government money at the same time). Either way, you pay less in taxes, and so you keep more of the money you earn.

In other words, you can earn more without minimum wage moving one bit.

But earning more is only half of the equation. We also need to find a way to help you spend less.

Obviously it would be very arrogant of me to just tell you not to spend so much money, especially considering that I'm running for an office that pays $162,100/year. (By the way, if I'm elected one of my first tasks will be to propose reducing that.)

But let's think back to our 1916/2006 discussion above. The real enemy of your buying power is inflation. If we could end inflation and push the costs of everyday necessities down, you'd spend less money, right? So how do we do that?

Well, first we have to think about what causes inflation. All financial systems work on a simple rule: if more money comes into the system than goes out of it, prices move up. If more money goes out of the system than comes in, prices go down. This is true of the stock market, the bond market, and even works at the grocery store. If people spend a lot of money on milk, the price of milk goes up. If they spend less money on turnips, the price of turnips goes down. In a system where there is "price stability," prices of some goods move up while prices of others move down, following the laws of supply and demand.

But we don't have price stability in America. We have inflation. About 2% per year. That means that every year, an hour of your hard work buys 2% less than it did the previous year.

Why do we have inflation in America? Well, a very big part of why is because the Federal budget isn't balanced. When the government spends more money than it earns, it effectively introduces more money into the economy as a whole (borrowed money). As with the price of milk or turnips above, the budget deficit is driving prices up nationwide.

(Another very real factor in causing inflation is a belief that "a little" inflation is healthy. I disagree. Price stability is healthy. Inflation robs you of your savings.)

If we can achieve price stability in America, eventually competition and technological innovation will bring down the cost of producing our necessities, and the costs of these necessities will come down (the cost of clothing has been experiencing this in recent years) while the cost of luxury goods will go up to balance it all out.

So, in other words, you can earn more and spend less if we reduce the size and cost of government.

The government can help you earn more by cutting your taxes. The government can help you spend less by balancing the budget and striving for price stability.

Cut taxes and balance the budget? Aren't those small-government, conservative notions?

Yes, but it's also the right solution for achieving a living wage for all Americans.