There are quite a few proposals to raise minimum wage and improve the lives of workers, but there is little discussion about what is a realistic way to calculate base pay.
Most Americans would agree that anyone employed full time should be able to afford the basic necessities to meet the minimum standards of subsisting in their specific community or region. It makes sense that those laboring 40 hours a week should be paid enough to make going to work worthwhile. It is reasonable to assume that if companies will not set a realistic standard for earnings, then governing bodies or voters should.
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The Economic Policy Institute argues for a “living wage” of $15 per hour which would lift 40 million workers — 26.6 percent of the U.S. workforce — out of poverty.
But the question is why that figure? Is there a better way to measure?
Why We Should Care About a Realistic Minimum Wage
Instead of debating what is fair, voters ignore the issue because they wrongly believe that minimum wage isn’t affecting their standard of living. Or worse, they think of imposing a living wage will end up killing jobs.
Failing to raise minimum wage to a real living amount based the basic cost of food, shelter, transportation, and medical care is simply a form of corporate welfare.
When companies fail to pay a living wage, taxpayers pick up the slack. It is not just food assistance, either. Children who grow up in poverty perpetuate the cycle. Those without healthcare coverage end up using emergency rooms for primary care, often waiting until a relatively minor issue becomes a major health problem. Higher pay means better healthcare outcomes.
The same year as the Affordable Care Act passed, hospitals provided $40 billion in uncompensated care.
More importantly, many workers are unable to avoid financial catastrophe or homelessness because of unforeseen emergencies. These are full-time workers who end up qualifying for greater assistance because they didn’t earn enough to weather a financial storm. We aren’t helping them to remain employed.
Because we do not require employers to pay a realistic wage, these American workers are sicker and stuck in dead-end jobs.
Realistic Minimum Wage Statistics
The statistics don’t reveal the true picture of what is a realistic minimum wage.
The US Bureau of Labor Statistics reports that only about 1% of full-time workers earn the federal minimum wage. This is because many cities and states realize the absurdity of paying workers so little.
In 2018, ballot measures in 18 states raised the minimum wage. These were still modest jumps with the highest being a $1 increase in Maine. Even these higher base salaries are still below a real living wage.
The federal government sets the minimum at $7.25 an hour, and annual earnings for full-time employment is $15,080 — before taxes. It has not increased for the past decade.
If minimum wage had kept pace with inflation, the floor in 1968 would be the equivalent of earning about $11.62 today.
This is higher than the amount set by most states, meaning that these workers have lost ground to inflation, far below a realistic minimum wage.
The cheapest rent in the country is in Wichita, Kansas at $470. Using the standard 30% rule, federal minimum wage is about $100 less than the cheapest place to live. The median rent of $1,234.43 is more than a federal minimum wage earner will take home in a month.
The government sets the poverty level at a threshold or minimum amount of income needed to cover basic needs. The feds arrived at this figure by using a low-cost food budget from the 1960s and multiplying by three. Ever since, the Bureau of Labor uses this same number and then adjusts for inflation.
The poverty calculation does not take into account the real changes in the cost of living over the past 50 years, meaning the threshold is essentially an arbitrary and meaningless number.
The federal government gives no consideration to budget fluctuations due to tax credits, public assistance, area cost of living, or skyrocketing healthcare costs. There is no accounting for charitable assistance, differences in the cost of transportation, job training programs, etc.
Therefore, income levels for determining poverty are the same in Des Moines as they are in San Jose.
A Better Measurement
National Academy of Sciences (NAS) issued a report in 1995, “Measuring Poverty: A New Approach” on updated methods to determine how we should define when an individual or family is poor.
The NAS recommended using current data based on how much families spend on food, clothing, and shelter, then adding a bit more. Their calculation was between the 30th and 35th percentile of family costs as measured in the Consumer Expenditure Survey. To arrive at the final figure, researchers added 15 to 25 percent for other expenses.
In today’s dollars, the NAS recommendations when adjusted for inflation set the poverty level at about $28,607 to $33,823 depending on location. To put this into perspective, the revised budget item for rent would be $712 to $845. That is an hourly minimum wage of $13.75 to $16.25 an hour.
MIT’s Living Wage Calculator uses a market-based approach “related to a family’s likely minimum food, childcare, health insurance, housing, transportation, and other basic necessities (e.g.clothing, personal care items, etc.) costs.” When adjusted for inflation, the range should be from a low of $10.34 in South Dakota to $17.64 in the District of Columbia.
Of course, politicians would be unhappy with a huge percentage of the population being deemed to be living at or below the poverty level. Corporations would balk at having to pay a fair wage. Essentially, they have shifted responsibility for their workers to the public and charities.
Any discussion about how much labor should be paid must start with a foundation of what amount meets an individual’s needs for subsistence.
If we want to set a realistic minimum wage, we must start with a poverty level that reflects what is needed for basic survival.