Let’s tie all government policy, starting with the minimum wage, to real poverty line data

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“Let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.”
– President Obama, State of the Union Address

With these words a new policy direction was announced. It’s not a small move, especially since it’s both the biggest effort to combat the Depression since the Stimulus Act and the biggest challenge to Republicans outside of the budget negotiations (which largely go nowhere). But for many progressives a higher minimum wage is long overdue. Even more important, linking it to a “living wage” sets a precedent that has not been a part of policy in most of my advancing lifetime.

How does this go down? It’s a fight we haven’t seen for a while, so it’s hard to tell. But it’s very popular and backed by solid research as a sound public policy. If only it went even further …

As we’ve discussed previously in Barataria, there is a basic “overhead” cost of life in America which we call the “Poverty Line”. It’s about $11.7k for a single person, $14.7k for a couple, and $22.8 for a mythical family of four. The overhead cost naturally varies dramatically from place to place, given the actual cost of living – it’s much lower in Lancaster County, Pennsylvania, than it is in St Paul, Minnesota (as my parents keep telling me) and much higher in Miami, Florida (as I remember).

The basic idea is the same – we can easily define a basic overhead per household. It varies by family size and type as well as location, but to pick a standard like the mythical family of four with one wage earner would give us a standard that would hold up over time, since 40 hours a week away from raising the kids is 40 hours to everyone. A good number to go with is $22.8k per year.

Someone working 40 hours, or two adults working 20 hours each, would have to earn $10.96 to be able to do that. Watch that number, it’ll come up again. It’s a very good benchmark standard.

A minimum wage set that high would be a huge increase over today’s $7.25, but it has precedence. If it had kept up with inflation since 1968, we’d be looking at $10.58 per hour now, which is not very different. Those who are trying to decry a higher minimum wage have to remember the effects of inflation when they become nostalgic.

More to the point, using some kind of benchmark like this as a center of all policy is a very good approach for a more politically neutral system generally. A flat tax with no deductions other than family size could use this point to create a much more progressive tax system than we have now – and if you use roughly double this number, or $11.4k per person per year as a flat 0% rate, a 19% rate on the remaining income would still produce all the federal tax we collect today at a substantially lower marginal rate on everyone.

In other words, tying all government policy, not just minimum wage, to real poverty line data has its benefits.

The common refrain against this is that minimum wages cost jobs, given that employers have to pay more for each employee. First of all, this is far from accepted – and there is considerable evidence that a low minimum wage does not cost jobs at all, within reason. At the very lowest end of the scale, Wal-Mart needs a certain number of people to open and that’s all there is to it. Another common argument is that very few work 40 hours at minimum wage, but that’s a bit spurious – many people in that position have more than one part-time job, so their total hours is still around 40. What we’re defining here is a minimum quality of life set at about 40 hours total – hit that target however you can.

Then again, the minimum wage is not what actual cost of an employee is. As Barataria has railed constantly, the overhead per employee exceeds wages by 30-100% based on many factors, and probably averages 45-50%. Wal-Mart does not pay its workers $7.25, it probably pays $9.42 or more already (at 30% overhead). A good compromise with business is that we raise the minimum wage, work to lower employment overhead costs, and split the difference with businesses. More jobs are almost certain to result, not fewer – even as most people get more money.

A living wage based standard as a fundamental tool of policy is a critical and useful step. It would guide laws and tax codes that are based firmly in reality and harder to weasel out of. Any problems with implementing this can be dealt with by other means because this is a good standard that we worth applying – if you work 40 hours you should be able to support a family of four. Git ‘er done!