Living Wage Versus Minimum Wage

Reasons for increasing minimum wages and the aftermath in cities of New York and Los Angeles

The Government regulates the operations of businesses to ensure fair competition within the market and protect the interest of the consumers. Also the government aims at ensuring that business owners respect and protect the rights of their workers. In many cases, the federal government has set minimum wages to be paid to workers in the cities. Depending on the cost of living some cities go ahead to adjust the set minimum wages upwards. Such action by the city authorities has variable impact on the businesses, consumers and the workers.

“Living wage is minimum hourly wage required by an individual to maintain specific level of living standards” (Sklar et al, 2002). Living wage is different from minimum wage in that minimum wage does not necessarily meet the need of living wage; that is, minimum wage set by the federal government may be too low to meet the needs of the wage earner. As a result businesses within the cities might be forced by the city authorities to raise the minimum wage to meet the requirements of the living wage here.

Since July this year the US hourly wage has been US dollars 6.55 but some cities and states have a higher minimum wage than this. Many states and cities have laws that require their local businesses to increase minimum wage beyond the federal set minimum wage. Through wage campaigns across the cities in the past few years, many cities have been able to raise their minimum wages. Increasing minimum wages in cities is aimed and reducing poverty as the cost of living rises and rewarding workers for jobs well done.

Case studies

New York City

In 2002 the New York City Council introduced a bill that would require all companies that were contracted by the council to pay their workers a “minimum wage of US dollars 8.1 per hour, provide health benefits and offer paid time out” (Labor Research Association, 2002). The city of New York had not adopted statewide minimum wage higher than the federal standard like other cities. The cost of living in the city was amongst the highest in the country. The federal minimum wage in 2002 was US dollars 5.15 per hour, which was too far below the living wages. The rate was too low such it could not meet the living wage standards of a fulltime worker with a family of two children.

Supporters of living wage argued that higher minimum wages and health benefits would reduce congestion in the public social services. They also held that low minimum wages result to high rates of worker turnover which might interfere with the services provided to the city by the contractors. Supporters of the bill argued that if thousands of the poor in the city were paid living wage then, poverty in the city would decrease. “In 2004 the city’s minimum wage was raised to US dollar 9.5 per hour higher than the prevailing federal minimum wage US dollar 8 per hour” (Labor Research Association, May 17, 2002). The living standards of many city dwellers improved for the best.

Los Angeles

In 2001, the City Council of Los Angeles passed a law that required all companies contracted by the city to increase the minimum wage to $ 8.97 per hour higher than that required by the federal government. The move was a relief to the city residents because according to many they were now better placed to meet their financial obligations; the city had high levels of poverty. The law was passed and implemented the following after numerous campaigns by the labor groups and the city council: “By 2001 more than 60 municipalities had passed laws that mandated businesses that received tax relief and companies under contract with the city, to pay their worker wages high enough to lift their living standards” (Robert Harbison, 2002).

The aftermath of living wages

Rising minimum wage above the federal set minimum wage has negative and positive impacts on both employer and employee and although the laws are aimed at reducing the level of poverty incidents in the cities. Although such laws apply to a small fraction of the laborers, only works in businesses under contract with the city do benefit from the laws. In the short run such laws have benefits to the worker and harm businesses. First, increased wages will put workers in some economic self-sufficiency hence are able to afford what they could not afford before. Secondly, some low wage earners hold two jobs, hence with increased wages; they can drop one job and therefore have much time to rest.

Thirdly, high wages increases disposable income of the individual households and people will be able to rise their spending. If businesses continue to keep low wages then their profits would remain low, because customers’ income is low. Again higher wages would guarantee the worker’s health insurance (Health care accounts for a higher percentage of family’s total budget) and new decent housing units. In general higher wages improves the living standards of workers and reduces the gap between the highly paid and the lowly paid groups in the short run.

On a positive side higher wages motivates workers hence, increases efforts in the work. As result, the business productivity increases transforming to higher profits. The Business competitiveness in the market increases and the potential to expand is inevitable.

In the long run the effects of higher wages are different; if businesses conform to the requirement of the labor laws, their cost of doing business in the long run would rise. Increased cost of production would be transferred to consumers in the form of higher market prices. Therefore increased wages to workers would be canceled out by high retail prices reducing the buying power of the wagers. Such increase in wages trigger inflation (wage-pulled inflation) hence increasing cost of living. As a result of higher wages many businesses may fail in the long run or lower their profits.

Wage rate is the price of labor. Opponents of living wages believe that any increase in the price of labor would harm workers hence increasing the level of unemployment in the cities. If the price of labor increases above the prevailing market price, the overall demand for labor falls, leading to high levels of unemployment. People who loose their jobs would no longer receive either the minimum wage or the living wage. The low skilled workers are the ones who would likely loose their jobs. Higher wages trigger businesses to lay off workers and cut the cost of production. Hence demand for higher wages may put the economy into more difficulties as the rate of unemployment and inflation due to high prices of labor. Hence authorities should allow the market forces of demand and supply to work to maintain the market in equilibrium.


Labor Research Association, 2002. Living Wage Law for New York City Aimed at Reducing Poverty. 2008. Web.

Robert Harbison, 2002. Living wage’ laws gain momentum across US. 2008. Web.

Sklar, Mykyta et al (2002), Raise the Floor: Wages and Policies That Work for All of Us, South End Press.

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