Minimum Wage and Poverty

Unions, collective bargaining, and fair wages are getting a lot of press due to the attempts in several states to introduce Right to Work laws, eliminate collective bargaining for public employees, and generally reduce the power of unions. It got me curious about what the current rules were according to the Department of Labor's Fair Labor Standards Act. What are the minimum benefits that an employer must offer?

The first item that comes to mind is minimum wage. Effective July 24, 2009, the minimum wage was increased to $7.25 per hour. There are some caveats though. If you are under 20 years of age, the employer is permitted to pay as little as $4.25 per hour for the first 90 days of employment. This falls under the subminimum wage clauses of the FLSA. That's pretty convenient for employers who look to pickup temporary help during the summer when schools are out. A fairly shrewd employer could substitute these youths for regular employees during the summer months and cut their wage expenses nearly in half. The hourly rate is even lower for those who regularly accept tips. Employers of tipped employees (anyone who receives more than $30 in tips in a month) may pay an hourly wage of $2.13 per hour, so long as the total of tips and hourly wage for the hours worked in that month at least equals the minimum wage rate.

So let's say that you are single, and you are entering the workforce after graduating high school. You are 18 years old and on your own. You canvas the town and are able to find a job with a local business. The business owner is very shrewd, and is only willing to offer the absolute minimums since you have no prior experience and no higher education. The owner offers you $4.25 for your first three months, with a pay increase to $7.25 at the end of those three months. The business is closed on all federal holidays (9 days in 2011), and is also closed the friday after Thanksgiving. You will not receive pay for holiday closings. You are permitted to take 5 unpaid sick days with short notice, and 10 unpaid vacation days with a minimum of one month notice. The employer notifies you that you may work a maximum of 40 hours in a week, but indicates that those 40 hours will regularly be available.

So how does this first year go for you? First, let's assume you work all of the hours that are available to you in that year.

52 weeks in the year.
40 hours per week

13 weeks at $4.25 per hour = $2,210
37 weeks at $7.25 per hour = $10,730
2 weeks at $0 per hour (holiday closings) = $0

Your total pay for the year would be $12,940. According to the census bureau, the threshold for poverty in 2009 for an individual under the age of 65 was $11,161.

That's pretty bleak, but that is also assuming the best case scenario that you were able to work every day of the year. In the worst case scenario, where you exhausted all of your sick and vacation time at the $7.25 rate, your annual income would have been $12,070. Minimum wage is just barely keeping you above the poverty line.

Now imagine if you were coming out of high school with a pregnant girlfriend. You move in together, and the baby is born during the year. You are now a house of three. One of you stays home with the baby because the cost of childcare is greater than the wage you are able to earn. The 2009 threshold for poverty for a 3 person family was $17,098. You've worked a full-time job for a year and you are still under the poverty threshold.

I've seen several remarks indicating that Governor Mitch Daniels has indicated that $9 per hour is a livable wage. Unfortunately, I can't find any documentation of this quote, so take it with a grain of salt. Even so, a quick perusal of the job postings in a newspaper or online will show that $9 per hour is a fairly common offer from folks looking for appointment setting and phone support staff. How would that $1.75 increase in pay affect our earner? Let's assume that our worker gets that rate throughout the year, and again, isn't paid for holidays but otherwise works all the hours available.

$9 per hour x 50 weeks x 40 hours per week = $18,000 per year

That would put them above the poverty line for a family of three, but just barely. Keep in mind that this is gross pay too, not take home pay. This has to cover not just food, housing, and transportation, but medical benefits (likely not offered at this wage level), retirement savings, taxes, and all of the other expenses of life.

So what does it all mean? I don't pretend to know. In theory, the appropriate wage for a particular role is what the market will bear. We all want to save money though, so we encourage businesses to seek methods to cut costs by demanding lower prices. Labor is one option for cutting costs, and this can lead to reduced quality when those who are qualified to do a job are not willing to accept the wage offered, but those unqualified to do the job are willing to accept it.

It will be interesting to see how the legislative moves in progress in several states impact their local economies.


D-nice said...

I see this all the time with families that I work with. There really is a cycle of poverty. These folks that are below the poverty line are at least able to get some social service help. WIC for the baby, Medicaid for the pregnant mom and for 6mon-1yr for her after the baby is born., food stamps, and MAYBE some rental assistance. However even with these supports they still fall behind especially if dad (who is usually the wage earner gets sick or hurt). Maybe dad actually gets that $9 a hour job. Then they lose all the social service supports they were getting and struggle even more! $7 is actually a more livable wage then $9 when social service supports are considered!

Adam Jones said...

That struck me as I was researching these numbers. There is actually an incentive not to get that better paying job because once you cross the poverty threshold you lose access to all of those supportive social services. It frustrates me to hear folks who refer to these services as "entitlements" characterize families who need these subsidies as lazy, choosing to live their lives this way. No one wants to live like this. I don't know if minimum wage is the right solution to creating an escape from the cycle of poverty, but doing nothing is definitely not the right answer.

Alcuin said...

It seems to me that sustainability is a big part of problem here.

If the money spent circulates around the local economy, then there's little harm and a lot of good in making sure that everyone is above the poverty line.

If the money spent disappears down a black hole, such as gas/heating oil money that goes to OPEC, then you have a problem.

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