From Minimum Wage to Living Wage

The American people might not feel generous enough to hand out enough unconditional cash to live on without working on the side, especially in these times of recession and ballooning budget deficits. But they might well be game for a plan to make work pay. This is a phrase that both Democrats and Republicans have been known to get behind from time to time. Here, we will develop an approach that is dramatically simpler than the recent Making Work Pay tax credit.

As our launching point, we start with an idea from the left: the living wage. Bring up the minimum wage so that every fully employed adult can afford basic food, shelter and medicine, and we eliminate the need for welfare for low wage workers. The Catholic Church long ago endorsed the idea back in 1891. In many respects the idea of a living wage fixes the worst problems of capitalism and reduces the call for socialism. Only one problem: the market minimum wage may well be lower than the living wage. Raise wages beyond what the market will bear and the result is more unemployment.

A workable proposal: keep the mandatory minimum wage near the market minimum and let free government money make up the difference. Let’s runs some numbers.

We start with a definition (and estimates) of a living wage by Housing the Homeless Inc. (This page is found in a frame inside of Pulling it out of the frame was the only way to link directly to the relevant page.) They use the HUD guideline that housing should cost no more than 30% of gross wages, and they assume that a 40 hour workweek is reasonable. That is, if you work full time, you should be able to afford your own place to stay, even if it is an efficiency apartment. They pull some HUD fair market rent values to estimate that you can get an efficiency apartment for $550/month [I round some of their figures] or a one bedroom apartment for $670/month. Obviously, these numbers will be low for expensive cities and more than generous for poorer areas.

Multiply these values by 12 months/year and you get $6600 and $8040 per year respectively. If these are to be 30% of a living wage then we divide by 0.30 to get target gross incomes of $22,000 and $26,800. Since minimum wage earners are generally hourly employees vs. on salary, let us go with a nice even 50 paid weeks per year instead of 52. This gives us 40 times 50 = 2000 hours of pay per year. Our required living wage is thus between $11/hour and $13.40/hour. This is rather higher than the current federal minimum wage of $7.25/hour.

Remember, before you advocate boosting the federal minimum wage up to the $11-$13 range, keep in mind that many minimum wage workers are teenagers, apprentices effectively who aren’t living on their wages alone. Outlaw such apprentice work and millions of people will be denied valuable work experience. Boosting the minimum wage to this degree would outlaw many of these apprentice level jobs since the market reaction would probably be to use fewer workers and do without some services.

Free money to fill the gap preserves these employment opportunities while ensuring that working adults can be self-supporting. At 2000 hours per year, the current minimum wage produces a gross income of $14,500/year. This leaves us a shortfall between $7,500 and $12,300 per year to make up with a universal stipend. The higher figure is pretty much the same as the $1000/month value we came up with by dividing up all 2008 tax receipts. The lower figure comes out to $625/month, which is more affordable given that we want to have some money left over to defend the nation and pay for other essential programs.

Before we settle on these figures we had better make sure we are comparing apples to apples. As part of the Free Money for All proposal, we propose to radically simplify the tax system. As a first cut, we propose to merge the income tax, FICA, Medicare and unemployment insurance premiums into a single tax bracket which applies to everyone save perhaps the truly rich, who might pay a bit more. To accurately match Housing the Homeless’ requirements, we should match net incomes. Simply taking their tables, they give after tax amounts of $1,837-$416 = $1,420/month and $2223- 504 = $1,720/month [after a bit of rounding].

The minimum wage with a 30% flat tax provides .70 * $14,500 / 12 = $845/month. Our original estimated stipends take this to $845+$625 = $1470/month and $845+$1000 = $1845/month respectively, which is a bit more generous than need be. To match the net income figures computed by Housing for the Homeless, the universal stipend needs to be between $1,420-$845= $575/month and $1,720-$845= $875/month.

The higher figure is close to half the $800/month we came up with when dividing up the federal treasury – the inputs that is. If Mercatus is correct and tax expenditures cost the government a trillion a year, we would have a trillion for defense, miscellaneous government, and paying those Social Security recipients who are owed more than $800/month. This might be workable. And as long as we run less than a trillion dollars short, we are doing better than our current complicated government.