Recently the idea of a “living wage” has come to the for with the “Fight for 15” campaign. The living wage has been a popular idea in the left for a while. I don’t plan on on showing how a “living wage” it will increase unemployment or hurt economic growth, you can find that stuff elsewhere. Rather I am going to show you how a living wage is impossible; it is simply not something that can exist given our present society.
As I have pointed out before, housing is the single largest expense in most households (other than possibly taxes) and is effectively a positional good. (Read the link for the full argument). Americans spend about a third of their income on housing, a number which has been increasing over time. As people become richer, they tend to spend more absolute money to obtain larger houses keeping proportionate housing expenditures at similar or even higher amounts. Housing costs as a proportion of income do not decrease as incomes rise on a societal level.
If you increase the minimum wage, people on minimum wage will spend more on housing as competition for housing increases deu to its status as a largely positional good. This will drive the costs of housing up. After a time of correction, housing costs will have increased in absolute terms but have stayed roughly the same relative to income. There will be no real improvement in the housing situation of most people.
The next big expense for homes with children and working parents is childcare. I’ve already explained why child care will always be unaffordable; essentially, given child care worker to child ratios, a minimum of a quarter of one person’s income is necessary per child for child care. If you raise the minimum wage you simply increase child care costs proportionately.
Finally, the costs of all other goods will increase as well. If you pay minimum wage workers more, the price of all goods will increase across the board, raising the cost of living, particularly for the poor who depend the most on low-cost goods.
Increasing the minimum wage will create minimal improvements for poor families receiving minimum wage (they may create moderate improvement for poor singles who don’t have child care costs and have lower housing needs) because the increased costs of good and services, particularly housing and childcare, will eat away any gains from the higher nominal wages.
A living wage is impossible for this reason; increases in the minimum wage will simply inflate the value of goods proportionately, so there are minimal real agins for the impovershed.
(This of course ignores the impact on the middle class; who will be greatly damaged by a “living wage” as the costs of goods and services increase while wages stagnate).