Wednesday, April 15, 2015

The Living Wage Controversy

"In public policy, a living wage is the minimum income necessary for a worker to meet their needs that are considered to be basic." (Wikipedia)

"A living wage is defined as the wage that can meet the basic needs to maintain a safe, decent standard of living within the community." (Wikipedia)

From time to time, I find myself entangled in discussions concerning the concept of a “living wage.” It sounds nice, but what does it actually mean? If someone actually believes they are entitled to whatever constitutes a living wage in their mind, no matter their skill set, knowledge, experience, or level of effort, I am afraid they are going to be sorely disappointed, angry employees or more likely, unemployed.

First of all who gets to decide on this living wage? The economists at the Massachusetts Institute of Technology (MIT) have created a living wage calculator. Do they have the right numbers or might someone disagree with their opinion? Obviously, the needs of a single mom living in San Francisco would differ radically from a college dropout living in his parents’ basement in Travelers Rest, SC.

According to the scholars at MIT, a single mom in San Francisco with one child would require $26.03 per hour. As a point of comparison, minimum wage in San Francisco is $11.05 per hour.

Compare this with the calculated living wage for the boy in the basement, $8.70 per hour. Contrast this to the current $7.25 per hour minimum wage in Travelers Rest, SC.

What if they both lived in Travelers Rest, SC? According to MIT, the single mom would require a hourly wage of $16.77. Let’s see? Two perfectly equal workers standing next to each other, performing exactly the same task; one earns 93% more than the other because she has a child? How do you think that would play out in the real world?

What if the employer can’t pay a living wage for a particular job? If the employer can’t earn a profit from an employee’s labor, that employee will not have a job for very long. At least in private industry, there is an iron law at work here. Government programs spending other people’s money can do anything they want, until, as Maggie Thatcher observed, they run out of other people’s money.

The math is pretty basic. Take any wage you want, for the sake of this example, let’s say $17.00 per hour.

$17.00 per hour X 40 hours per week X 52 weeks per year = $35,360 gross annual salary.

However, that is not what this employee costs the employer. Overhead, depending on the nature of the business and location typically adds somewhere between 50% and 100% to that number. Let’s split the difference and add 75%.

$35,360 X 1.75 = $61,880

This particular employee must generate at least $61,880 in value, usually measured by the bottom line, to her employer’s business or her job will simply not exist. These numbers are pretty realistic. I remember an example presented by the owner of a small electronics firm in New Jersey. His median employee happened to be a secretary who earned something a little over $37,000 a year. Her cost to the company was about $73,000 per year.

Ultimately, the cost of business (including taxes) are not paid by the corporation, they are paid by the consumer. If an employer can’t pass the cost of a living wage on to his customers, at some point that company will go out of business. Actually, it is worse than that. If the employer can’t get a competitive rate of return on his investment from hiring an employee, he will find other uses for that money. Increasingly, other uses would include robots, programmable machine tools, and applications of artificial intelligence in the “cloud.” In the back offices of America, middle level professionals are being replaced by a combination of low skill data entry clerks and sophisticated accounting systems.

Please understand that I believe the creation of high wage jobs for the average high school graduate with no particular skills is the number one problem facing our country. Over the last 40 years the American worker has been hit with the confluence of three titanic forces, globalization, automation, and regulation. During the 1950s the United States had the only industrial infrastructure that wasn’t bombed into rubble during World War II. By the mid 60s German and Japanese products were flowing into our country. Today, the Gross Domestic Product of China has surpassed that of the United States. If low cost Chinese labor is being replaced with robots, what is the future of the American worker? Finally, the cost of compliance for a multitude of Government regulations has driven entire industries out of business in this country.

Companies that have the ability to pay high wages to average employees who have no particular economic value or skill set must generate enormous amounts of wealth creating their goods and services, more than enough to earn an acceptable Return on Investment. The question then becomes, “How can we best encourage companies to bring those jobs back to our country or create stable jobs that pay a living wage in this new era?”

Don’t wait for this situation to improve. Take action to improve your own life and the lives of those around you. Think like an employer. Ask yourself, what am I worth? If you want to earn $40,000 a year, understand that you are costing your employer somewhere between $60,000 a year and $80,000. Would you pay yourself $75,000 a year for what ever it is that you do? If you want that job you will need to provide at least that much value to your boss or he will go out of business.

The best way to increase your value to your organization is to increase your own personal worth. How can you make yourself a more valuable human being? What skills can you add to your toolbox that will make you a more desirable employee? What are the problems and questions that keep your boss awake at night? How can you answer those questions? How can you solve those problems?

Because one skill is no longer enough, dedicate yourself to becoming a lifetime learner. The world is constantly changing. There is no guarantee that what you are doing today will be of value to anyone tomorrow. Look for opportunities to study new subjects or keep your current specialties current. I think this is particularly true in the scientific and medical communities, but even more humble trades like the automobile mechanic have become technical professions requiring advanced computer diagnostic tools as well as specific certifications for particular types or brands of vehicles.

Do not believe that another degree or certification in another computer language will guarantee your future any more than that first degree that didn’t get you a job. Once you have that new skill, find a way to practice that new skill, even if you need to start your own business.

It all comes down to the paradox of success. In order to advance your own agenda, you must forget about yourself and your agenda. Instead, you must focus on the agenda of your employer or your customers who are ultimately, your employer. Then you will earn much more than a living wage, because you’ll be worth it.

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