The Universal Living Wage Fraud

Around Austin we've been hearing a lot lately about how important it is to have a so-called Universal Living Wage. This is part of a nationwide campaign which is using Austin as a test-market for an effort to get local governments to establish minimum wages within their jurisdictions which exceed the federally mandated minimum of $5.15 an hour.

The theory behind this movement is that the federal minimum wage is too low for anyone to actually live on in many parts of the country, and that a large segment of the population is suffering because of low wages which make it impossible for them to afford basic necessities like food and housing. But is this basic premise correct, and can those pushing this idea even get their math right?

Let's set aside for the time being the questions of whether we should even have a minimum wage and of whether municipal or regional governments ought to be in the business of dictating wages to businesses, and look at the basic flaws in the reasoning behind the Universal Living Wage movement.

If you visit the Universal Living Wage website they give a rundown of the formula for figuring out what the ULW should be in an area, based on rents in that area and the HUD standard that 30% of a person's income should go to housing. For Austin it comes up with a result of about $10.60 an hour, more than double the federal minimum wage. It's a lovely formula, except for the fact that it is based on a completely flawed assumption - really a collection of faulty assumptions.

The underlying conceptual error is that they seem to believe that the minimum wage is all that a large portion of the work force will ever be paid, and that a minimum wage job should provide a good living without requiring any sacrifice from the worker. They assume that the minimum wage is the standard in the workforce - all workers are ever going to earn - rather than an entry-level wage which requires some sacrifice from workers who will likely be motivated to move on to better paying jobs in the future.

This skewed perspective leads to huge errors in how they model the wage requirements of workers. The gigantic, glaring false assumption is that all minimum wage workers live by themselves in an efficiency apartment or larger accomodations, paying exactly the average price in the marketplace. They assume that minimum wage workers are not married, do not live with their family, and can't possibly find ways to reduce their overhead by sharing living space or moving into a less desirable neighborhood.

What they fail to do in looking at their formulas is what actual minimum wage workers have to do - work backwards from their salary to figure out what they earn and what they need to do to live on that salary. Just sticking with the issue of rent on which the ULW formula is based, it's easy to show how a worker can live on minimum wage. His wages are $5.15 an hour, so that's $893 a month. He gets 30% of that, or $268 to spend on rent, based on the HUD formula. According to the statistics used by the ULW folks, that's not enough to rent an apartment - but wait, it's just about right to pay half the rent on an efficiency apartment. So your minimum wage worker has to have a roommate - just like college students and families, they have to save money by sharing living space. That's not a hardship, that's the standard way of life for most of the people in America. In fact, if he goes in with three friends to rent a two bedroom apartment and share rooms, they can bring their rent in well under that $268 a month - not to mention saving on food expenses, travel and other overhead by sharing resources. The combined income of four minimum wage workers is $3572 a month. That's $42,864 a year. If that were the income of a family of four no one would say they were about to be tossed on the street - they might not be rich, but they could certainly live decently.

The next flaw is that in their formula they use the average housing costs for the Austin area. The same skewed perspective applies here. They assume that minimum wage workers will not try to economize and live in less expensive housing. Rather than paying $550 or so to live in a nice new efficiency in north Austin, a smart minimum wage worker is likely to live east of IH35 and maybe somewhat south, easily saving 20% on his rent and bringing it down to $440 or so. Add in the roommate factor and the minimum wage worker ends up spending well under the recommended 30% of his income on housing.

Here's the ironic part. Just with these two economizing measures - standard for a huge portion of the population - the minimum wage worker can probably bring his rent down to about $175 a month. Based on the HUD standard, that suggests that the Universal Living Wage should actually be about $3.36 an hour. Not that I'm suggesting lowering the minimum wage. I don't really think much of the HUD standard. To live decently, even on a budget, you ought to be able to keep housing costs well under 30% of your income. But as I've demonstrated, that has very little to do with the minimum wage. I'm really not sure there's any need to have a minimum wage at all.

The reality of working in the Austin area is that only a very small portion of the workforce is paid the minimum wage. Because of low unemployment and the demand for workers in low-skill jobs, most starting wages are actually higher than the minimum wage or are linked to rapid wage increases to a level around $6-$7 an hour, with the possibility of further advancement, or are specifically targeted at segments of the workforce - like teenagers - who have much lower overhead. Even if the federally mandated minimum wage were lowered or done away with, the marketplace would set a starting wage at or higher than $5.15 an hour.

What the ULW folks need to realize is that a minimum wage job is not a career. It's a starting point, but if it's all you can earn, then you should expect to economize and reduce your expenses while you look for a way to earn a better income. Setting an artificially high base wage will put small businesses at risk, hurt the economy and ultimately put people out of work. Let the market set the wages and let the workers make sensible efforts to economize. Our economy and society will go forward towards prosperity and increased opportunity for all.