Minimum Wage Isn’t a Living Wage

The headline above is from the Open Economics blog run by current and former students at Notre Dame. The post is based on a widely reported story that:

[T]here is no state in the country where a 40-hour minimum-wage worker can affordably rent a two-bedroom apartment (at fair market rent).

So no, as their headline makes clear, the minimum wage isn’t a living wage.

…And yet millions of Americans are simultaneously making minimum wage and not dying. To me, that’s pretty good evidence that minimum wage is a living wage. That was test one: the sniff test. Test two is the common sense test. It asks this question: why would a single occupant rent a two-bedroom apartment? Sure, I can think of some reasons, but they are extraordinary. Shouldn’t the comparison be whether an individual making minimum wage can afford a one-bedroom apartment if they worked a 40-hour work week? Or even a studio? Two bedrooms seems arbitrary. We may as well say, “An individual making minimum wage can only afford three steak dinners a year.” Ok, and?

The third test is the matching test. Or in this case mismatching. Why are we matching the country’s lowest wage earners (on the income side) with the country’s average apartment prices (on the expense side). Apartments cost what they do precisely because there is a particular distribution of demand for housing that is a product of the wage distribution combined with personal tastes. If we, say, doubled the wages of everyone below some nominal level do we really expect that apartment prices will be unaffected? That flies in the face of the economic way of thinking. If we are concerned about low income earners lets compare their wages to low-income rents, not to the median rent.

Let’s examine Alabama, for instance. Alabama has no state wage and is thus governed by the federal minimum wage of $7.25. This leads to a yearly income of $15,080 for a 40-hour workweek. Less if you account for taxes and time off. The per capita income in Alabama, however, is $33,945 (which I am assuming is also for a 40-hour week). If you are suspicious of per capita numbers, maybe you prefer the median income of a 2-person family (the Census does not keep records for 1-person “families”), which is $52,287. If we divide that evenly we get roughly $26,000 per person. Another site lists $40,287 as the average salary in Alabama. Any way you slice it, you get a pretty wide spread between the average income in Alabama and what the lowest income earners make. We should compare housing options accordingly.

Lastly, we need to ask ourselves if those making the minimum wage are even looking for housing? Wages tend to increase with experience so we would expect the youngest and least experienced employees to be those making the minimum. Let’s stick with our Alabama example. In that state teenagers are legally able to work when they are 14. Even assuming that at 18 every one of them moves out, that gives a window of four years where an individual might be making the minimum wage and have no desire at all for independent living, much less a two-bedroom apartment. This fact artificially inflates the problem because it assumes that there are large numbers of minimum wage workers nationwide that can’t afford housing, when, in fact, a non-trivial portion of these workers are teenagers or young adults living at home.

Living off of the minimum wage, by American standards of living, is often not a fun nor an easy life. But if we are going to discuss the plight of the poor let’s be realistic about what challenges and difficulties they encounter and not simply use bad statistics to point out that there is an arbitrary level of material comfort that they cannot afford.

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One thought on “Minimum Wage Isn’t a Living Wage

  1. as they all say, the rich get richer whilst the poor get poorer and also at the same time prices for necessities such as electricity, water, and housing increases (happening in Australia as we speak) which has a much more significant impact on the poor compared to the rich. Very interesting post was a great read. If you have time check out my blog l talk about the same topics as you!

    Kind Regards,

    Kit

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