Impact Insight: Does a Living Wage Cost a lot?

An element of the discussion around impact investing that often emerges is that of the concept of a "living wage". In essence, a living wage is the minimum amount of income needed by a worker working full-time in a given geography to achieve a basic standard of living. This basic standard of living includes having a safe place to live, food to eat, basic healthcare, reliable child care, access to transportation, and sufficient funds to cover all applicable taxes. This standard is not so robust as to include what many consider to be critical buffers and aspects of a quality life such as a rainy day reserve, entertainment opportunities, expanded access to healthcare or dental care, nor does it include any student loan debt obligations. It is the wage required to stay out of the homeless shelter but not to begin planning for the future.

Currently the Federal minimum wage is set at $7.25 per hour, the level to which it was last increased in 2009. Since that time, the federal minimum wage's purchasing power has declined by almost 10% due to inflation. Within the working-age population, roughly 30% of all hourly, non-self-employed workers receive an hourly wage that is less than 40% above the federal minimum (less than $10.10 per hour). In recent years, twenty-nine state governments and several dozen major cities have set higher minimum wage standards for employers in their jurisdictions. As a result of the actions by state and local governments, over 60% of the United States' working-age population now lives in areas where the minimum wage has been set higher than the federal standard. In parallel, a national movement has gained strength to increase the federal minimum wage to $15 per hour, a change that has received support from over 50% of voters surveyed.

Seattle, Washington is one of the cities that has increased the minimum wage for workers in the city above the federal minimum standard. In June 2014 the City Council voted to raise the local minimum wage to $15 per hour, phased in through 2021. Employers with more than 500 employees who do not provide healthcare benefits were required to implement the $15 wage standard this year. Employers with over 500 employees that do provide healthcare benefits will be required to do so in 2018 with smaller employers implementing the wage increase by 2021. (Note: The May 2017 preliminary unemployment rate in Seattle was 3.3% compared to 4.3% nationally and 4.5% in the State of Washington.)

Two recent studies have examined the outcomes of the increase in minimum wage requirements in Seattle, with the studies coming to divergent findings regarding the impact. The first study was undertaken by the University of California, Berkley and found that the increase in minimum wage requirements as implemented through the end of 2016 (by which time the phased increases had reached $13 per hour for most businesses) had minimal impact on employment rates in the food services industry (restaurants, limited-service restaurants, full-service restaurants) on which the study focused. The study also found that wage increases were not statistically significant overall in the full-service restaurant sector but that a 2.3% increase was observed in the limited-service restaurant sector, contributing to a nearly 1% increase in wages in the food services industry overall.

The second study, undertaken by researchers at the University of Washington at the behest of the Seattle City Council, found that there was a reduction in total payroll across low-wage jobs in all industries reviewed as a result of the increase in minimum wage requirements. This overall decrease was the result of the intersection of a 9% reduction in overall hours worked by laborers in low-wage jobs while hourly wages in these jobs increased by roughly 3%. This intersection of factors led to a net loss of earnings for low-wage earners overall. The study, however, did not include companies with more than one operating location, contract or “gig” jobs, work paid “off the books,” self-employment, or work done outside the City of Seattle resulting in the exclusion of over 40% of the total Seattle workforce from the study’s findings.

These two studies add to the corpus of research regarding the impact and costs of implementing local living wage requirements. To date, a strong consensus has not yet emerged regarding the overall implications of such policies when viewed from a macro level. However, a consistent picture has emerged that the structure and amount of a living wage is local in nature and that regional impacts on employment levels have been minimal. As a result, the movement for increases in the minimum wage can be expected to continue at the local and state government level.

Source: Pew Research Center; New York Times; U.S. Bureau of Labor Statistics; National Employment Law Project; University of Washington – Evans School of Public Policy and Governance; University of California Berkley – Institute for Research on Labor and Employment; University of California Berkley – Center on Wage and Employment Dynamics; Fortune