How a living wage is calculated

The Economist explains

ON APRIL 7th Chicagoans went to the polls to select a new mayor; after a hard slog, the incumbent mayor Rahm Emanuel beat his challenger Jesús “Chuy” García. Mr García’s upstart campaign targeted Mr Emanuel’s technocratic administration, which, he argued, paid too much attention to the concerns of businesses and the rich. As part of his plan to govern on behalf of all Chicagoans, Mr García proposed to raise the city’s minimum wage: from the current $8.25 per hour rate to $15 per hour. That rise would match the increase planned for Seattle, which began pushing its minimum wage toward $15 with an initial bump on April 1st (from $9.47 to $11). Both Chicago and Seattle plan to raise their minimum-wage rates well above the federal minimum, currently $7.25 per hour. That is intentional; the architects of Seattle’s minimum intend it to be what is commonly called a “living wage”. But what, precisely, is that?

Advocacy for living wages has emerged as concern has grown that legal minimum wages (a policy fixture in many rich economies for much of the last century) are too low. Minimum wages are flat rates in most of the nations and jurisdictions that have them. In America, at the federal level, the minimum wage allowed is $7.25 an hour (£4.90) for adults. States may set higher rates (and quite a few do). Britain’s minimum for those 21 and older is £6.50 an hour ($9.60). In China, the minimum varies by district or city from about 9 to 17 yuan ($1.50 to $2.75). America’s national minimum wage can only be increased by an act of Congress, and the current rate remains well below its inflation-adjusted peak of nearly $11 an hour in 1968. The British minimum wage is raised regularly, by contrast, based on recommendations from the Low Pay Commission, an independent body made up of representatives from business, unions and academia. British wage rises nonetheless tend to fall short of cost-of-living increases. Few would dispute that America’s federal minimum wage is inadequate to cover necessities in much of the country, grossly so in households with multiple dependents. In Britain, according to the Living Wage Foundation, the minimum wage is estimated to be about 20% too low, or 30% short in London. Economists are divided over whether minimum wages have benign effects on employment. Yet, there is broad (though occasionally grudging) agreement that moderate increases lift the working poor out of poverty and can reduce dependence on the government.
Why some economists oppose a minimum wage
Estimates of what constitutes a living wage necessarily vary by location and household type. In calculating its living wage figure, the Greater London Authority (GLA) uses two separate approaches to compute a “poverty threshold figure”, each of which incorporates local conditions in London. The first surveys the cost of living in London in order to compute a “low cost but acceptable” household budget, which is used to determine the poverty-threshold wage. A second approach calculates the threshold wage based on London’s income distribution; the threshold is the wage which allows a household to have an income 60% that of the median. In 2014 the first approach yielded a wage of £7.65 while the latter gave £8.25, for an average of £7.95. The GLA then adds 15% as insurance against unforeseen events, giving a living wage of £9.15. In other areas, like Seattle, the emphasis is on living costs alone. There, medical costs and childcare for households with children must be factored in, along with the lowest reasonable estimates for housing, access to transportation, services and education, and an assurance of a sustainable pension at the end of a working lifetime. The Alliance for a Just Society takes this basis and adds a 10% margin for debt repayment and savings to get its estimate. On this basis, it calculates a living wage of $15.99 an hour for a single-adult household in Washington State, and of $20.02 an hour per adult for a household with two adults and two children. Seattle’s mayor, Ed Murray, suggests $21 an hour as the living minimum for any household. American living wages are generally higher than those in Britain, because more public services are provided to Britons through the state.

In some cities living wages are promoted by advocacy groups interested in getting firms to adopt the rate voluntarily. In London, firms and local governments who meet criteria set out by the GLA can earn accreditation and public praise. Public pressure seems to be having an effect on employers; McDonald’s, which recently announced its intention to raise the wages paid in franchises it controls, has been the target of intense criticism by living-wage advocacy groups. Yet advocates are increasingly hoping that living-wage estimates will influence the setting of legal minimum wages. They seem to be making headway. Over a dozen states added or increased their minimum wage rates in 2014. Sceptical economists may half-welcome the momentum as an opportunity to observe how the increases affect employment, poverty and productivity, but those workers fortunate enough to earn a living-wage paycheque will surely appreciate advocates’ progress. –BY G.F. | SEATTLE, Timekeeper