The Wage Question: Where’s the line between fair pay for employees and too high a burden for employers?

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By Rob Montana

Tompkins Weekly

Every two years, Alternatives Federal Credit Union issues its Living Wage Study.

 

The living wage – the update released in August saw it increase

to $13.90 per hour for people who have employer-provided health insurance, $15.11 per hour for those who don’t – is meant to show how much people in Tompkins County need to earn to live here. That figure takes into account the cost of housing, transportation, food, communication, healthcare, recreation, savings, miscellaneous expenses and taxes.

 

Now, compare that to the federal minimum wage of $7.25 per hour, and the New York state minimum wage of $9.70 per hour, and you’ll see a significant disparity.

In Tompkins County, there are actually more than 100 businesses and organizations – including Tompkins County’s government positions – that pay a living wage. But the conversation continues about what’s fair pay and how much local employers can afford to fork over before the burden becomes too much for them to remain competitive in the marketplace.

 

So, where’s the line that achieves the most fair situation for both employees and employers?

 

“It is an elusive target,” said Lance Compa, a senior lecturer in Cornell University’s School of Industrial and Labor Relations. “It’s always going to come down to which side you’re on, whether employers make more profit or employees make more wages. If you go to one side too much, you’re going to wreck the economy.

 

“If employers rely on exploitation of labor to be profitable, the workers are going to suffer,” he added. “If the wages rise too high, businesses will go out of business. It’s always about finding the right balance.”

 

Stephen Sweet, an Ithaca College professor in the sociology department, said it’s important to remember that when the federal minimum wage was established, it was on the basis of a living wage equation.

 

“How much does it cost for a house? How much does it cost to feed a family?,” he said. “The problem is that calculation was never tied to any means for adjusting it.

 

“Families are spending a lot more today on basic needs than they did,” Sweet added. “A lower income family may be spending more than half of their income on rent; in the 1960s, a lower income family may be spending a third of their income on rent.”

 

Not providing a means for changing minimum wage tied to inflation or increasing cost of living is a big part of the problem, Sweet thinks.

 

“Our adjustments to minimum wage are often political, and it can stagnate,” he said, noting that a period of about a decade in the 1990s saw no increase. “If it was tied to a means for adjustment, it wouldn’t be a political issue, and it wouldn’t be seen as something that is looking to go above and beyond what minimum wage was meant to be.”

 

Elizabeth Kaletski, assistant professor of economics at Ithaca College, said cost of living calculators should be used to determine a fair wage for particular region.

 

“MIT has developed a well promoted one, but local organizations have created their own as well – it is thought that local organizations would have a better pulse on what individuals in the area need to meet basic needs,” she said. “However, calculating wages based on cost of living (living wage) doesn’t mean we should automatically increase wages to that level. Especially if there is a large difference between current average wages and that living wage.

 

“Instead policy should look at increasing wages slowly to give businesses time to adjust,” Kaletski added. “For instance, in New York, the current policy increases wages by a dollar or so each year (depending on location and industry), so businesses have time to figure out strategies that will account for these increases in cost.”

 

Sweet thinks a more localized approach to wages would be best.

 

“The standard would have to be tied to the local community,” he said, noting that costs are much different for people living in Tompkins County, New York City and Mississippi.

 

Alternatives living wage study is “quite rigorous,” Compa said, adding that it provides a good idea of how much people need to make to live adequately.

 

“You always come back to a value question: What does adequate mean?” he said. “There is no final answer on that, and it depends on where one stands in terms of their own values.”

 

Sweet noted that those earning minimum wage are often able to “make ends meet” because they receive social services, such as welfare assistance and heating assistance.

 

“Otherwise it wouldn’t be possible for them to get by,” Sweet said. “In other words, taxpayers are paying to make up for the low wages paid by some employers.”

 

Another issue is that minimum wage survival or living wage calculations don’t allow for saving much money.

 

“A living wage is not really built for having much of a buffer for unexpected events,” Sweet said. “Sometimes a living wage is perceived as people having luxuries, but it’s not really designed for that.”

 

Politics, it seems, is a big roadblock to finding a happy medium for a minimum wage.

 

“It’s always a political struggle. Broadly speaking, employers want to hold down costs, and employees naturally want higher wages,” said Compa. “I think collective bargaining is the best way to approach it.

 

“Fostering union organization in low wage sectors is the way to go; I would allow workers to organize on a sector level, like fast food workers, and not on a store-by-store basis,” he added. “I think private sector workers should be able to organize and get better benefits.”

Compa is an advocate of collective bargaining to find the right balance, saying that employees and management will be able to find the “sweet spot.”

 

“There is compromise,” he said, “where nobody wins, but also nobody loses.”

 

In the lower range of the labor market, such as those earning minimum wages, unions and collective bargaining is not widespread, Compa said.

 

“So, you’re left with public policy choices about minimum wage,” he said.

 

Sweet said collective bargaining could help to create equitable wages, but cautioned it wasn’t a perfect solution.

 

“Part of the problem is that unions historically fought for the interests of its members. If you have a union workforce, even at peak membership, there still might be two or three employees that are not union members,” he said. “They would be left behind because they’re not engaged in the collective bargaining, because they’re not union members.

 

“But, collective bargaining does increase leverage and helps level the playing field,” Sweet added.

 

Compa noted that more than half of the states in the U.S. have a minimum wage that is higher than the federal rate, and most allow for a less than minimum wage for a probationary or training period.

 

“I think it’s reasonable to have something marginally lower for a training wage, to take into account training costs,” he said. “That’s reasonable, but you want to guard against companies rotating people in and out at subminimum wages.”

 

Kenny Christianson, a lecturer in economics at Ithaca College and a senior lecturer in economics at Binghamton University, said workers who earn low wages are not as productive, for a variety of reasons. They tend to get sick more, have lower morale and are more likely to be absent from work.

 

“For employees, you need to be able to have enough pay to support yourself,” he said, adding support means enough to cover basic necessities.

 

While payroll is a large chunk of employers’ budget expense, turnover is a larger issue.

 

“If you have more turnover, the cost of training workers might be more than the pay increase for the employees you already have,” said Christianson. “Employers are concerned about profits being reduced, and it might not be easy for them to raise their prices, depending on the market. But, if they have a workforce happy enough to be productive, they can figure out a cost structure so they can stay in business.”

 

Christianson said a basic argument he has in the classroom is one used by employers that say they’ll have to either lay off employees or increase their prices to remain financially viable, if minimum wages increase. His response to that is that increased productivity will offset those payroll cost increases.

 

“If the workers make more, they often are going to be more productive, and a firm can cover those costs, because the workers are providing more output for the firm,” Christianson said.

 

He noted a study done of fast food workers along the New Jersey-Pennsylvania border in the 1990s.

 

“New Jersey raised minimum wage and Pennsylvania didn’t,” said Christianson. “The workers in New Jersey became more productive, there was better morale and the firms were able to keep their workers and keep paying the higher wage.

 

“If workers are happy, they’re less likely to leave their jobs,” he added. “When you’re paying low wages, it basically limits the amount of workers that are available.”

 

Sweet pushed back against the argument of those who say minimum wages are typically paid to teens who are working afterschool or on weekends.

 

“If you look at the typical minimum wage worker, most commonly they are adults, not teenagers,” he said. “They are far more commonly women, not men, and there are differences on the basis of race and geography.

 

“If you walk into a McDonald’s or Target, places that are lower wage employers, look at who is servicing you,” Sweet added. “Also, teenagers are working less and less now than they were two decades ago. They are spending their time preparing for college.”

The largest impact of increasing a minimum wage, Kaletski said, is that it will increase the cost of production – resulting in fewer job opportunities or less hours of work.

 

“It may also result in the increase in prices for consumers on certain products,” she said. “It is further possible that it could increase inflation as a widespread increase in costs would increase prices of products across the board, but I don’t think there’s much evidence that this occurs.”

 

Kaletski said those employer arguments are legitimate, because an increase in cost of labor will have to be offset in some way.

“Neoclassical economic theory says that as the price of something increases, the quantity demand of that decreases (price and quantity move in opposite directions),” she said. “It’s the same way with the labor market – as wages (the price) increases, firms will hire less workers (the quantity).

 

“As it turns out the empirical literature indicates that the first thing a firm does in response to increases in the cost of labor is to cut hours, not fire employees,” Kaletski added. “Firms’ owners can be quite creative in how they deal with an increase in cost, but it will result in a higher burden for them.”

 

Compa said one benefit of raising minimum wage or establishing a living wage – as long as it doesn’t become an untenable amount – is that it forces employers to be more effective.

 

“Rather than just holding down wages to keep profits where they want them, employers learn how to better use technology, to do better marketing, better research and development, better planning of workflow,” he said. “These are all things that management controls.. If they understand they have to provide a minimum wage, they will find more ways to be productive and profitable.”

 

Kaletski said there are many costs and benefits to increasing the minimum wage.

 

“One of the major benefits often overlooked is the marginal propensity to consumers of lower and middle income households,” she said. “A boost in their real wages would induce increased demand on a variety of products – when they have more money, they are more likely to turn around and spend that money (while higher income individuals may save it), leading to higher economic growth.”

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