State of the Union: Make Minimum Wage a “Living Wage”?

One of the things stated in Obama’s State of the Union focused on the minimum wage.

“Tonight, let’s declare that, in the wealthiest nation on Earth, no one who works full time should have to live in poverty — and raise the federal minimum wage to $9 an hour.”

As he went on, he further declared:

“Let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.”

First, I think we need to understand what a living wage is. Do you mean the minimum wage should be a wage where you can pay all your bills? Pay all of your bills without assistance? Pay all of your bills, plus be able to buy food that is properly nutritious and not leading to obesity? Migrate you to where you live above the poverty level?

What is A Living Wage?

Without a proper definition of what a “living wage” is, we have no foundation for a logical conversation on the subject, which means we are going to get into emotional bias baiting. According to wikipedia:

In public policy, a living wage or subsistence wage is the minimum income necessary for a worker to meet basic needs (for an extended period of time or for a lifetime). These needs include shelter (housing) and other incidentals such as clothing and nutrition. In some nations such as the United Kingdom and Switzerland, this standard generally means that a person working forty hours a week, with no additional income, should be able to afford a specified quality or quantity of housing, food, utilities, transport, health care, and recreation, although in many cases child care, education, saving for retirement, and less commonly legal fees and insurance may cost a family more than food, utilities, transport, or health care.

This is also fairly useless, until you can put actual numbers on quality and quantity, so wikipedia continues:

In addition to this definition, living wage activists further define "living wage" as the wage equivalent to the poverty line for a family of four.

Now, something w)e can talk about. The US poverty level for a family of four is $23,800 (2012 numbers). If we take 40 hours a week for 52 weeks (2080 hours), the hourly for this level is $11.08. If the employer does not offer time off (vacations, holidays, and sick leave), the worker will need $12.16 to stay above the poverty level. If we want to include the cost of healthcare, we have to add another $8 for family coverage, when using the current cost of employer sponsored family health coverage in America, so a living wage is around $20 per hour if you have the person pay for their own healthcare as part of a living wage (NOTE: According to the IRS memo on PACA (aka ObamaCare), the cost of a minimum plan will be $20,000 (page 56), so the living wage needs to be about $22.50 if PACA is the measure).

NOTE: In later portions of this entry, I will focus on $12 an hour, as that is a nice round figure that best fits the living wage definition, sans full cost of health coverage.

Is this feasible? Before we can have that conversation, we need to at least examine the economics of such a policy. We should also ask the question if minimum wage was meant to support a family and maybe if assuming it was is a good policy.

Economics 101

Let’s understand economics first. Money, by itself, is worthless. You have to get this concept down before you can go any further. A dollar is worth the faith you and other Americans put into it. This is especially true now that the dollar cannot be turned into gold or other precious metals, but even gold is only worth what people think it is worth. In fact, this is core tenant of capitalism.

The natural tendency here from some is “that is why capitalism is bad”, but I am not speaking of a capitalistic system, but natural human capitalism. It is an ingrained moral concept that when somebody gives you something, sans a special occasion, you feel some obligation to give something back. This is true whether or not you live in a capitalistic society. Ever hear the term ‘”Calling in a favor”. While a “favor” is not money, it is a form of currency, and people are expected to pay in kind for favors. This many not apply to all gifts and all people all of the time, but if you disagree examine whether you have ever had a situation where you gave and gave and got nothing in return. Did you feel cheated? If so, the concept holds true. If not, you are not in tune with the majority of people.

What ultimately has value is the products or services money can buy, not the money. So, if we want to know if someone is poor or not, the monetary amount they make is a good indicator the moment it is discovered, but a poor indicator the next year and possibly even the moment it is published. This is why the poverty level rises (and theoretically falls).

The real determination of whether you are poor or not is whether or not you can purchase food, shelter and clothing, not whether you have $10,000 or $100,000.

Economics also tells us that prices rise when costs rise (this will be important in a moment). And human nature tells us a good percentage of people will eventually give up if they feel there is no way to get ahead. The second topic here is important when we understand a national economy. National economies are based, in simplistic terms, on the Gross Domestic Product, or the fruit of the labor of all of the workers. The more people who are productive, the better everyone, or nearly everyone, is. This is not important to the minimum wage topic directly, but it does deal with the getting ahead topic, which is a motivation for a minimum wage as a living wage.

One other thing we have to realize about economics before moving on is the price of goods is based on a few factors. First, there is supply and demand. When supply is high and demand low, prices drop and vice versa. Second, we have to understand that there is a minimum threshold a price can drop for a business. This is a moving target, to an extent, as businesses can find ways to become more efficient and save costs, but when you add the cost of employees, raw materials, utilities, supplies and waste, there is a bottom line to what a product costs to produce. To remain in business, you have to pull in more money than the product costs. This is not true for all products, as a company can lose on one product, but make money on another (a good example is gaming consoles, which are sold at a loss, but the loss is made up in the licensing fees for games).

Should the Minimum Wage Support a Family as a Living Wage?

This looks like an easy question, but in reality it is a hard question. To answer, we have to determine if families are being supported by minimum wage. If not, then why set the bar there (more on this as we move forward)?

I can only find statistics from the 90s. According to this statistic, only 5% of low wage, low-income workers have chidlren. Of these 61.8% remain on a low wage for extended periods of time. The bar was set at $7.50 and the current minimum wage is $7.25.

From the stats, it appears people with families are not the primary recipients of minimum wage in the United States. And, if true, then minimum wage, as a living wage for families, is not a good goal, as it is not helping those whom we state need help. In fact, it may be hurting some of them (if we don’t change certain factors of our society, that is).

The importance of this question comes out in the next section, as raising the minimum wage has consequences. These consequences are understood when we truly embrace the idea currency is only worth the faith people have in it, or in concrete terms, currency is only worth what it will buy.

Where Do You Stand?

Before getting into the raising of the minimum wage, we should look at where you are, as you are more familiar with your own salary. Here is a chart of the averages, distilled from this article (the poverty level was confirmed against HHS stats).







Lower Class



Lower Middle









5% level



1% level



Raising the Minimum Wage

Whether the “living wage” figure is $12 an hour or $22 an hour is inconsequential. Not in the sense of making it work for a “living wage”, but because that figure will constantly rise if a living wage is defined as keeping people above poverty. What is important is how a living wage keeps one above the poverty level.

Let’s say tomorrow we raise the minimum wage to $12 an hour. What are all of the things that would happen.

1. Workers below $12 an hour would get a raise to $12 an hour. But the raise would be uneven, as shown in the chart below:

Before – hourly Before – yearly % above min wage After % raise To match % above min – hourly To match % above min – yearly
$7.25 $15,080 0% $12 65.52% $12 $24,960
$8 $16,640 10.34% $12 50% $13.24 $27,542
$9 $18,720 24.14% $12 33.33% $14.90 $30,984
$10 $20,800 37.93% $12 20% $16.55 $34,427
$11 $22,800 51.72% $12 9.09% $18.21 $37,870

Let’s explain the chart. The before shows what the person makes today (hourly and yearly). The % above minimum wage is how much the person makes above the current minimum wage, so the person making $7.25 (the current minimum wage) is at 0%, while the person making $11 is 51.72% above the minimum wage. The third column sets that each person will make a minimum of $12 after the law passes. The Percentage Raise column shows how much of a raise the person will get, as a percentage. And the last two columns show how much a person would need to make to keep the same percentage above minimum wage he/she had prior to the new law going into effect.

It is implausible to think that the person making $11 an hour currently will go to $18.21 per hour, or $37,870 per year, after the new law is passed. While he will likely get a raise, it will more likely cap much lower (perhaps $15 per hour). As a result, he is economically worse off than he was before the new law passed. In reality, the only person who seems to benefit fully is the person at the bottom of the run. And he is not that well off, as we will see.

As we move up into salary, we will eventually reach a level where few, if any, workers get a raise. For example, the person making $50,000, roughly the current median income for a family of four, is unlikely to see much of a raise, if any, if the minimum wage is raised to $12 an hour. Why? Because they are not seen as affected (and because businesses cannot absorb that much cost – next point).

But, let’s look at the person who makes $12 an hour today (approximately $25,000 per year). He, and his family, are above the poverty level. When the minimum wage rises, let’s say he gets a 10% raise to $13.20 per hour, or roughly $27,500 per year. he seems pretty good off, right? After all, he is 20% above the poverty level with his new raise (8% above prior to the raise). This will be important later.

2. Business have to respond to the new expenses. This initially hits businesses that hire a lot of minimum wage workers, as the cost to make products goes up instantly. There are a couple of ways businesses can respond:

a) eat the rise in cost and operate on a lower profit – this is only feasible in certain situations.

b) Raise the price of goods – This effectively makes everybody’s money worth less than it was before the law.

c) Become more efficient – While this is occasionally a good thing overall, the most common immediate savings come from figuring out how to get the job of 10 people done with only 8 or 9.  Or jobs are shipped offshore, where they are less expensive.

As you can see, a raise in the minimum wage most often leads to rising costs of goods and loss of jobs. A business can certainly absorb a 1% cost, especially if their competition eats the cost, but it is extremely unlikely a company can bear a 60% increase in employee costs (a company with mostly minimum wage workers). But companies with non-minimum wage workers are not free, as the cost of the goods and supplies they use also rise when the companies employing minimum wage workers rise. The percentage is not across the board, but it is higher than half the increase. But, for the sake of argument, let’s say the cost of goods, overall, only rises 20%. The following chart shows the average cost of some items and what they would cost with a 20% increase (this assumes no business will use the government mandated rise in costs to make more profit)

Product Current Price (2012) Price after 20% increase
Loaf of Bread 1.88 2.26
Gallon of Milk 2.79 3.35
Pound of Bacon 4.48 5.38
Dozen Eggs 1.54 1.84
5 lb bag of Sugar 2.42 2.90
5 lb Bag of flour 2.98 3.58
Pound of ground beef 4.78 5.74
Pound of grapes 1.98 2.38
Toilet Paper 3.96 4.75
Chicken Soup (Can) 1.75 2.10
Gallon of Gas 3.91 4.69

This chart was pulled from The People’s History (and is used as an example of increases, not a firm measure of correct prices).

In real dollars, if you currently pay $100 a week for groceries for your family, the new cost will be $120 per week, or an extra $1040 per year. Just to stay even on groceries alone, you would need to get a 50 cent raise. Here is an easy chart to determine what you would have to make at different percentage rises in the cost of goods, just to maintain your current standard of living.
























































































































3. The numbers in poverty increases

If the cost of goods goes up 20%, we can assume the poverty level goes up by around the same amount . This is largely to make things easier to visualize, as the actual percent rise is likely to be within a reasonable deviation of this percent. The new poverty level goes up from $23,050 to $27,660.

Now, let’s note a few things.

A) The minimum wage worker is now below the poverty level, as he is making $12 an hour or $24,960.

B) Our family of 4, who was above the poverty level by 8 to 10% is now below the poverty level. And this assumes no greedy corporation further raises prices to make a bigger profit. It is merely a consequence of raising the minimum wage.

NOTE: This assumes prices will only rise 20%. In reality the prices will rise much higher, perhaps as much as 50 – 60% (maybe even the full 65% suggested). If the price goes up 50%, the poverty level will be around $34,500 and it will be around $38,000 if the prices go up 65%. What this means is a family that was 65% above the poverty level before the law is now in poverty. And this is just based on the changes in the law.


The point here is not that we should not do anything to the minimum wage, but rather that we have to look at the bigger picture. As soon as we start tying the minimum wage to a standard, like a living wage, everyone is affected. This is true because a dollar is only worth what it buys. If the price of goods goes up, the value of the dollar goes down. If you change the minimum wage, especially drastically, you will see the price of good go up. And everyone will be hurt.

Some will be hurt by losing their jobs, as companies try to avoid raising prices drastically. The good side is the efficiencies that will come out of it, but it comes a huge price. A 65% increase in minimum wage costs are likely to reverberate with layoffs in many companies. Some will be hurt by price increases. The more we try to tie minimum wage to the poverty level, the more people sink into poverty. And this will happen if even corporations decide to lower their profits. The picture below shows the median income of the United States to be roughly $50,000.

Today, the median band is more than 2 times the poverty level. With a 20% increase in the cost of goods, they are only 80% above the poverty level. And with a 65% increase, they will only be 30% above the poverty level. But this only shows part of the story.

Now, let’s move back to the different family examples we have looked at. With only a 20% increase in prices and the corresponding 20% increase in the poverty level:

  • The person who started in poverty at $7.50 an hour is still in poverty at $12 and hour, although not as deep.
  • The person who started barely in poverty at $10 or $11, is now deeper in poverty.
  • The person who started at $25,000  and got a 20% raise to $27,500 was upper lower class, but is now is in poverty.
  • The average family, who was making $50,000 per year, who was in the middle of the middle class, is now lower middle class.

If the prices go up 50%, the reverberations hit even higher, as middle class families making somewhere in the upper $40s are now in the lower class. And the poverty level rises to more than $35,000 for a family of four.

And, if the minimum wage is tied to the poverty level, it takes years, or decades, to stabilize. The end result is a good portion of the middle class disappears, with the majority of the members becoming members of the lower class.


Once again, I am not stating nothing has to be done, but rather that we have to decide if we want the resulting society that comes from such a shift? The net result is the middle class shrinks when you raise the minimum wage. We end up with more people in poverty, at least until we can equalize the wage. The first few years will be a nightmare.

This means we are going to have to rely more heavily on the upper class, but history has shown us governments are bad at doing that, except in times of revolution (where they often kill a good portion of the wealthy, only to make a new upper class).

I did not even touch on what can happen to government roles if we continue to have entitlements. At some point, it becomes palatable to live on assistance rather than continue to work hard to rise above a tide that keeps coming in. Eventually it will equalize, but how many will give up. We can then look at the vultures that prey on society. If prices rise faster than salaries, which is going to happen at the lowest levels of society and reverberate up into the middle class, more and more people will look for alternative ways out, which will be a wonderful ground for the hucksters that sell financial snake oil.

My point is Obama’s idea of tying minimum wage to a “living wage” will only work if a) we accept the pain of such a move or b) it is done slowly, and probably both.

The serious question we have to answer is this: If the minimum wage is not the salary for most families, is it logical to reduce the size of the middle class, push more people into poverty and increase the unemployment rate to attempt to solve the “minimum wage” problem? or is there a better way? Thus far, modern government has not shown itself to be very adept at actually solving the real problem.

Peace and Grace,

Twittter: @gbworld


2 Responses to State of the Union: Make Minimum Wage a “Living Wage”?

  1. Steve Beamer says:

    Does that “Living Wage” include things like, a cell phone, cable TV and (pardon me) cigarettes?

  2. Steve: One of the problems without having a definition for “living wage” I assume?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: