The "living wage" fallacy says that businesses are morally obliged to pay workers a wage that will sustain their lives.
The idea of an obligatory living wage is anachronistic superimposition of feudalism upon a modern exchange economy. Serfs had no mobility and no choice but to take what the lord was giving them. A living wage was due the serf from the lord. The lord had total control over the lives of his workers.
In an exchange economy, workers have mobility. Workers can take their labor to other employers who will pay more. In contrast to the lord, the employer does not have total control of a worker’s livelihood. The employer’s sphere of activity, in comparison to the lord, is limited to effectively organizing the means of production to efficiently produce goods and services, thus creating wealth and opportunities for employment. The worker is a free agent who serves the employer only under the very limited terms of contractual agreement for the business enterprise. The employer does not have the obligation for the workers material provision nor does the employee have any obligation to the employer beyond the contractual work agreement. The employer is responsible for paying a just wage (not living wage) freely negotiated between non-coerced parties. It is incumbent upon workers to develop skills and experience for exchange in the marketplace that will sufficiently cover material needs.
We know there are some in society who are incapacitated or otherwise unable to earn a living wage. Society is responsible for taking care of the poor. Compassion and mercy need to be extended to those lacking sufficient resources to exchange in the marketplace but that comes from outside the economic calculation of a business contract (and employers are often among those extending compassion and mercy from their own financial resources.) Government taxation for certain kinds of support may be part of the solution. Strong families, churches, and voluntary associations are critical. Business is one institution within society but it is not the function of businesses to sustain workers lives. “Business” is not a synonym for “society,” nor are businesses feudal lords.
This is not to say that sorting out justice and compassion issues are always simple. Migrant workers go to work for large agricultural enterprises. Their wages are well below what most Americans would settle for in pay. Yet many of these workers endure great hardships, leaving homes and families, in order to earn this low wage. This should tell us something about the conditions migrant workers are leaving in order to take advantage of these low wages. These people were not forcibly dragged into the fields and made to work. They see these low wages as an economic opportunity.
However, that is not to say that these workers are necessarily truly free agents. Should they have difficulties or should their employer become abusive, they have no financial reserves and no local support network. Many may be in the country illegally. They are in a highly vulnerable situation. Therefore, workers are reluctant to involve governmental entities. They will endure many injustices instead. Corporations and growers can easily be tempted to use these circumstances to the detriment of workers. My intention is not to minimize the difficulties of such complex justice questions but rather to suggest that predicating justice on feudal concepts of living wage is not a helpful place to begin.
Here is a scenario that helps make a point about just wages. You want to keep your lawn mowed and trimmed. Two men, approximately twenty-five years old present themselves to you as yard care workers. Based on what you have been able to determine, these two men have equivalent skills, experience, and reliability. They provide the same quality of work in the same amount of time. You check around and find that most yard care folks of their quality in your area charge $10-$12 per hour.
Now the US poverty rate for a single adult is $9,973 ($5.00 per hr.) and $26,683 ($13.35 per hr.) for a family of six. In our scenario, the first man is single with no dependents. Allowing for overhead and other expenses, he needs a wage of $7.50 to net the poverty wage of $5.00 an hour ($5.00 wage plus $2.50 per hour for overhead). He offers to work for $10 an hour. The second man is married with four children. Allowing for overhead and other expenses he needs a wage of $15.85 to net the poverty wage of $13.35 an hour (plus $2.50 per hour for overhead). He offers to work for $16 an hour.
- Man 1: $10.00 = Single man
- Man 2: $16.00 = Married man with four kids
Which of these two men are you going to hire? The overwhelming majority of us are going to hire the first man. Why? Because we are heartless evil capitalists, callous to the plight of the second man? No. Because we determine wages and prices based on the value of the services rendered, not on the need of the person rendering the service.
The market signal to man number two is that he needs to pursue other options in order to make a better living. If government intervenes in the market to set a minimum living wage at $16.00 so that a family with four children can earn an above poverty income, then that signal is muted, distorting the decisions people make. Furthermore, what are you and your neighbors actually going to do? Many will opt to cut their lawns themselves. Some will hire neighbor kids and pay them under the table. Others will opt to cut their grass less frequently and skimp on trimming. The demand for the service will drop. The handful of yard care folks who manage to stay in the market will benefit from the mandate, but many of those who could have been working at $10-12 hour will now be without a job making the poverty situation worse.
Society (of which business is one institution) must have poverty reduction as its mission. But society consists of families, neighborhoods, informal networks, churches, education institutions, voluntary associations, businesses and governments. When people are incapacitated from providing for themselves, society needs to provide for folks through its array of institutions. When able bodied people experience a gap between what they earn and what they need to be beyond poverty, society with its array of institutions (of which business is one institution) works to help them eliminate that gap. Again, the contribution of business is to effectively organize means of production to efficiently produce goods and services, thus creating wealth and opportunities for employment. Businesses are obligated to pay a just wage, which is whatever wage two non-coerced parties agree to. If the wage is insufficient for living, then society (an array of institutions) must endeavor to help that person develop the wherewithal to close that gap.
The living wage places the sole responsibility of closing the gap on employers. Why? What is the rationale? Why should employers be singled out as the gap closers instead of society? When you and I hire lawn care workers we determine wages and prices based on the value of the services rendered not on the need of the person rendering the service. Why do we then want to mandate that businesses pay workers more than the value of the services rendered, thus distorting the market by sending false singles to workers about the value of their work and destroying jobs in the process? Forcing employers to pay more than services rendered is state mandated “charity” except that in the traditional sense, charity is freely chosen act.
There is no biblical or ethical mandate that requires business alone to shoulder the responsibility for meeting employee’s economic needs.