Paying a Living Wage

With President Obama’s proposal to increase the minimum wage for Federal workers to $10.10 an hour, the subject of paying a living wage has arisen throughout the corporate community. Back in 1938, President Franklin D. Roosevelt took a harsh tone when he asked Congress to enact (as it did) the Fair Labor Standards Act. “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country,” he said.

So what’s a living wage? MIT professor Amy Glasmeier studies the issue on a county-by-county basis. She asserts that it varies between $12 and $55 per hour. If true, there should be no expectation that the minimum wage is a “living” wage.

Opponents of raising the minimum wage predict employers with a concentration of minimum wage jobs will be forced to lay off workers, or at least freeze hiring. People on the other side of the argument, including many economists, argue that higher minimum wages can help business by improving productivity and retention, for example, and that fears of mass layoffs are overblown.

The simplest, and perhaps most superficial argument is that paying higher wages will put more money in workers’ hands, which they will promptly spend and stimulate the local economy. Henry Ford believed paying higher wages would force other business to do the same, making cars suddenly affordable to the average laborer’s family, expanding the demand for his products. It worked out that way for Ford, who also fiercely opposed labor unions.

The fact that raising wages will remove that higher payroll increment from the wallets of business owners is considered less consequential in the view of some economists, because they assume those not living on the margins can save and invest a higher proportion of their earnings. Of course, this assumption may still be a tough sell to those who are negatively impacted by the raise.

Another argument, more appealing to business owners, has been developed by University of Massachusetts economics professor Arindrajit Dube. He points out that the proportion of teenage minimum wage job holders is small and declining — from 26 percent in 1979 to 12 percent in 2011. This suggests a higher minimum wage would not be lost on a demographic segment that may need it the least.

Lower Turnover?

His research examines, among other things, the cost (to employers) of employee turnover, which generally is high with minimum wage positions. When minimum wages go up, overall employment in low-wage job sectors doesn’t change significantly. What does change, though, is that turnover “falls sharply,” according to Dube. Employees, for whatever reasons, stay put longer.

You can test that conclusion against your own business experience, while also analyzing what it costs you to cover a vacancy when someone quits, and find and train a new employee. For some, depending on the circumstances, it may eventually turn out the net cost of paying a higher wage is actually a negative number. Or at least not as much as a payroll increase might suggest.

Please let us know your thoughts on this important subject, and contact us if you have any questions.