After attending the annual Intercollegiate Studies Institute (ISI) Leadership Conference in Indianapolis, one of the things I thought about was a living wage. The argument by many of the participants was that the best way to lift people out of poverty and provide a living wage was to provide a robust economy — basically, trickle-down economics. Even Thomas Woods’ talk, which had a religious character, had this general idea. In fact, when he was asked to reconcile St. Peter’s teaching on obedience to the government with disagreement on welfare policy, he largely fumbled the answer, in my opinion. I favor my response to the question.
The problem with talking about a living wage is that it always talks about the issue from only one end of it. Either you have to artificially raise wages or trickle-down will raise wages. Still, this only talks about the problem from the aspect of raising the amount of money getting paid. There is another way to get to a living wage: decrease the cost of living so that current wages are sufficient.
Increasing wages by raising the minimum wage is an unsatisfactory solution by itself. There is a finite amount of money going around and all things being equal, a business will offset increased costs by cutting costs elsewhere. In the realm of employment, they will usually not hire as many people or not pay people above the minimum wage as generously (i.e. stagnate wages at the minimum wage line). It presents an intractable problem. What is better — 90% employment at 80% of a living wage, or 80% employment at 90% of a living wage? Costs could be cut elsewhere, but businesses already have the incentive to do that. Creating a burden is unlikely to help them be more efficient. This skips past that difficultly of setting a living wage (for what type of living arrangement) and that some people shouldn’t be paid a living wage (high school students, college students, temporary workers).
This also can lead to inflation because any cost a business incurs will be passed on in its prices. Those increased labor costs will get passed on again and again to the only entity that is unable to pass off costs. We’ll call that person “the consumer.” We could theoretically determine a living wage at some snapshot in time and mandate that all workers be paid that wage. Even if there is no additional unemployment, that increased labor cost will result in increased prices across the board. This translates to an increased cost of living and makes the living wage insufficient once the costs pass through the system. Even if you could control the rate of employment, there is no way to set a living wage. It would increase the cost of living and make that living wage insufficient again.
The solution to this problem is to stop focusing on the size of the paycheck and to start focusing on the cost of living. There are several components that make up the cost of living. There is food and the sales tax to buy that food. There is housing and the property tax levied against that property. There is medicine, government fees, income tax, etc.
One way to cut the cost of living directly and immediately is to cut taxes. This can be accomplished be getting rid of wasteful and unnecessary government spending which is always inefficient and bleeds money away from the economy. Even welfare payments bleed money off that remains in the black hole of Washington DC.
Another way is to decrease transaction costs for people doing business. For instance, the legal and insurance systems allow for businesses to not only prepay their future lawsuit settlements, but also provide a nice way to compartmentalize those costs and pass them on to the consumer. The dirty little secret about suing companies is that they aren’t the ones paying — society is. And in fact, you’ve already paid.
Likewise, property tax gets passed down to renters in the form of higher rents. Sales tax raises prices for consumer goods. Higher business taxes make for higher prices. Increased regulation makes for higher regulation costs and higher prices.
To effectively reduce the cost of living, every regulation, every tax, and every wasteful or unnecessary government spending initiative needs to be stopped. There are important regulations and things the government should tax and spend money on. However, it will always spend money inefficiently and bleed money away from the economy when they do it. This needs to be minimized.
Productivity gains, increases in efficiency of production and distribution, and new technologies will also help (as it always has) to increase the quality of life of all workers. This is where trickle-down is most helpful. However, it’s only part of the solution.
The more the cost of living can be reduced by reducing the bleeding effect of government spending and regulation, the more people there will be living above the poverty line.