Living wage laws dictate what the lowest legal earnings can be when companies pay their workers. The current national minimum across the United States is only $7.25 per hour, although several states have local laws that pay $3 to $5 more per hour than this rate. Some cities have passed mandates to make the minimum become $15 per hour. Salaried workers are sometimes exempt from these laws.
The purpose of having a living wage law is to prevent companies from exploiting the desperation of workers. The amount of compensation should be enough to let employees after shelter, clothing, and food. From an American perspective, the problem is that the minimum amount has not kept pace with inflation. If it did, then the minimum wage laws in the United States would require almost $11 per hour.
The first minimum wage was set by the Fair Labor Standards Act in 1938 as part of the New Deal project to protect workers. It also banned child labor and limited the working week to 44 hours. Several pros and cons of living wage laws are worth considering.
List of the Pros of Living Wage Laws
1. A living wage improves worker morale.
Desperation does not create happiness. When workers don’t know if they’ll have enough to cover their bills or provide for their family, then that is their primary focus. If you can pay that individual enough so that their essentials are covered, then their attention can be on productivity, personal improvement, and educational opportunities to continue raising their standard of living. Even though the increased wages are an expense for the business, it gets offset by the enhanced levels of productivity from each worker.
2. Living wages can inspire economic growth.
Raising income to a living wage provides an increase in earnings for each neighborhood affected by this outcome. When families spend their money at local stores, then this income can almost double the economic value for the community when compared to money spent at businesses from outside of the city. As the money gets spent, additional merchants down the chain of purchasing also experience this advantage of a living wage.
3. A living wage mandate can improve employment opportunities.
The states in the U.S. with the highest living wage law requirements also experience some of the best job markets in the country. Washington State often requires businesses to pay the highest minimums in the nation, but it is also ranked at or near the top of the best places to live in the United States. The District of Washington experiences a similar result, and it has the highest wage in the country.
Although critics will point out that unemployment rates increase with a higher living wage, it is almost always a negligible result. The regions with the highest wage minimums have a median unemployment rate that is less than one percentage point higher than the national average.
4. Higher wages create lower turnover rates for employers.
As workers increase their experience levels, businesses find that there is a requirement to compensate them adequately. If that outcome does not occur, then the qualified workers look for new employment opportunities that are possible with a higher wage. This reaction forces employers into a costly sequence of training new people to replace those who leave.
With a living wage extends to all employment opportunities, there is a real possibility for a company to keep their skilled workers happy. This outcome can lessen hiring costs over time, reducing the unfavorable effects that high worker turnover rates cause. There is less employee movement between jobs because everyone is earning at a similar level.
5. A living wage can reduce family dependencies on welfare.
The Trump Administration announced a work requirement change for able-bodied adults who receive food stamps in the United States. Almost 700,000 people will lose access to benefits through the government’s SNAP program. The goal is to encourage people to become self-sustaining, but a push for living wage laws could be a better solution.
Many of the workers who earn the minimum wage depend on social assistance programs to meet their essential needs. These families might also visit their local food banks and other community service resources. All of these safety-net services receive funding through local tax dollars already. A small rise in the cost of goods can be offset by the economic productivity of higher minimum compensation levels.
6. Lower poverty levels develop in regions with living wage requirements.
The Congressional Budgeting Office notes that a living wage requirement of $15 per hour could take almost one million households out of poverty in the United States. Critics say that if you pay one person when the previous minimum would allow two jobs, then the higher unemployment rate creates a bigger burden for society, but this outcome doesn’t usually happen. Almost all workers see an increase in their salary while increases in real income occur.
There aren’t any disadvantages to consider when looking at this key point until the living wage laws require compensation that is six times higher than what the defined poverty level is for the country.
7. Living wage laws off an opportunity to establish a thriving Middle Class.
Before conservative reforms began after the Carter Administration, the upper tax bracket in the United States for the wealthiest few was above 90%. That’s why the decade of the 1950s is often seen as a “golden” time for the economy. The Middle Class could thrive because excessive income was redirected toward better base wages for skilled workers. Most of the houses used in Michigan today came from this structure.
If a living wage law were to pass that required enough to pay for essential needs, then this outcome could happen again. It would create a fairer system of income distribution that doesn’t collect wealth in the top 0.5% of earners in the country. Giving families access to those higher wages is what would create a trickle-down effect in the economy instead of providing all of the breaks to those at the top of the wealth chain.
8. Higher living wage minimums can improve tax receipts for communities.
The equation is fairly simple. If someone is paying an average of 12% in taxes on their income from all fees and sources, then local governments receive more when a person’s income rises. Under the current structure for American policies on wages, someone at the $7.25 per hour level may not even have enough to qualify to file a tax return in some years. Individuals in poverty only pay sales tax or common fees under the law in most situations. Boosting their wages will create a larger pool of funds that upon which communities can draw to benefit everyone.
9. Consumer spending would increase with higher living wage laws.
Whenever a $1 increase in the lowest minimum wage occurs in the United States, consumer spending per household can increase by up to $2,000 per unit. That means a significant boost to this mandated amount can result in thousands of dollars of extra spending per person in a community. This advantage creates a significant reserve of resources that can let people start saving or investing in money instead of trying to scrape by on each paycheck.
The communities with the lowest average weekly earnings levels would benefit the most from this advantage. It also adds more diversity to the economy, ensuring that local businesses have more chances to thrive.
10. It allows minority demographics to thrive in local economies.
The wage gap between men and minorities or women has slowly decreased over time, but it is still an issue that drags down economic activities in many communities. Some industries pay their workers equally, but most are still preferring white men over any other population demographic. When an increase in the living wage requirements occurs, then it begins to equalize wages for everyone by mandate instead of through market theory.
Most high-wage earners with an hourly paycheck would see a boost to their earnings, so a living wage mandate cannot solve the entire problem. It could help Hispanic women, who in some industries make 54% on the dollar for their work compared to white men, because the government requires more equality.
List of the Cons of Living Wage Laws
1. Living wage laws put more stress on small businesses than any other group.
A living wage law might provide workers with income benefits, but it is also an unfunded mandate that businesses must meet to stay in compliance with local regulations. That means the greatest burden of this expense is going to fall on small businesses and individual employers. When the last change in the minimum wage went through for the American economy, cost increases were over $4 million higher in each state. The only way to counter this issue without laying off workers is to increase the cost of goods or services at the consumer level.
2. A higher wage minimum means an increase in business labor costs.
Labor is the largest budget-line expense for most businesses. It can be over half of the outgoing payments that a company makes each year. If the government passes a living wage requirement that increases this amount, then the typical response is to hire fewer people to balance the budgetary scales. This disadvantage can eventually cause the unemployment rate to rise, which means low-wage workers have a more challenging time trying to find work.
Some smaller companies might not have the ability to operate with fewer workers. If they cannot change their expense profile, then it might force them into bankruptcy. That outcome also causes the unemployment rate to rise while creating less diversity in jobs for the local community.
3. Living wage laws do not guarantee a reduction in poverty levels.
A higher pay requirement with living wage laws can help the workers who can maintain their employment. Those who are out of work will have fewer opportunities to find a job, while some might find layoff notices waiting for them since the costs are higher. Information from the National Bureau of Economic Research shows that more people can find themselves on social support programs because experienced workers get higher pay while those with less experience end up losing their jobs.
4. Living wage requirements can lead to higher levels of job outsourcing.
Paying workers more seems like a great idea on paper, but living wage requirements can often lead to job outsourcing. This disadvantage is the exact reason why a majority of clothing imports come from China, Bangladesh, and Thailand. When a local culture doesn’t have high wealth standards, then sending someone a job from overseas will help that company spend less while receiving an equitable result.
Changes to the gig economy over the past decade mean that outsourcing can also stay at home. Even if a company pays an independent contract a full-time wage, U.S. law doesn’t mandate that workers receive benefits in that employment structure. That could provide a savings of tens of thousands of dollars for each job given to freelancers.
5. It could expand the underground economy.
A high living wage can reduce the number of tax revenues that come in for the government each year because it encourages an underground economy. Workers who can’t find jobs will get paid cash under the table for odd jobs. Tax codes require this income to be documented and a return filed, but proving a cash payment can be challenging. When the cost of labor is so high that it becomes unmanageable for sole proprietors and small businesses, then this disadvantage seems like a reasonable way to still make ends meet.
6. Implementing living wage laws can create internal conflict for businesses.
When new standards for a living wage become law, businesses often get into compliance with the expectations without regard to their experienced workers. That means someone who just came off of the street could make the same amount that it took someone 10 years to earn. That isn’t the fault of the employer since the government mandates the change, but this fact won’t stop internal conflicts from starting.
Some companies lay off their least experienced workers in this circumstance because it gives them more money to pay others. The opposite can also occur. The most experienced workers can sometimes leave, forcing a business to pay the same labor cost for less quality in the workforce.
7. Marketplace costs rise when living wage minimums increase.
Raising the minimum required wage at any level might general more household income, but it can also cause prices to rise on store shelves. If someone starts earning $100 more per week and spends $100 more each week to get the same items, the only benefit from this scenario goes to the producer and retail of that item. The consumer doesn’t get to experience an increase in their standard of living. That forces workers to put in longer hours, start a side hustle, or find other ways to make money – negating almost all of the potential benefits.
8. Living wage laws can encourage higher high school dropout rates.
When businesses must pay their workers a higher wage, it could disincentivize the idea of going to college for an advanced degree. Students may choose to enter vocational programs or apprenticeships instead so that they can start earning a paycheck. Although this can be an advantage for some families and communities, it can also create long-term problems for some industries.
Workers who only have a GED can earn up to 40% less in their lifetime when compared to someone with a high school diploma.
Presidential candidate Andrew Yang says that he wants to give every American $1,000 per month in guaranteed income. He calls it the “Freedom Dividend,” and it offers a universal living wage of sorts. Everyone over the age of 18 would receive this payment from the government. The cost of this system would come from a 10% VAT and the money currently used for social-welfare spending.
Yang suggests that recipients would have the option to choose their existing benefits or this cash payment. It can encourage entrepreneurial efforts, improve worker bargaining power, and reduce workload requirements.
Would a higher living wage minimum benefit the economy? If people can earn more, then they are typically more productive in the workplace. If businesses can manage that expense, then this regulation can be highly beneficial. It could also be the final nail in the coffin for some businesses that are barely getting by as it is.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.