The Ethics of a Living Wage

Proponents of a "living wage" often argue that it is the employer's social responsibility and moral obligation to pay workers enough to live on - hence the term "living wage."

For example, an online acquaintance once told me:

I don't understand this obstinate refusal to believe that people deserve to be paid a living wage. We're not talking about giving them a check to sit on their rears and do nothing, we are talking about paying them a decent wage for the work they do.

Try looking at this argument from a slightly different perspective by considering the following scenario.

Let's say you want to purchase a new car. You would be willing to pay up to $15,000 for any new car as long as it runs properly and is moderately reliable. Luckily, a small Korean manufacturer offers a car that meets your needs and charges only $10,000. That's $5,000 in consumer surplus for you!

[Note: Consumer surplus is like profit, but for the consumer as opposed to the producer. For more on consumer surplus, look here]

But before you take advantage of this bargain, consider this: the Korean manufacturer has been struggling financially for years under the pressure of increased competition, and may go out of business if it doesn't start earning more revenue. Its workers will be out of their jobs, its investors will lose a considerable amount of their savings, and the management's careers may be ruined. Taking all of this into account, do you believe it is proper for you to pay less than you might otherwise be willing to pay if the market price were higher? Doesn't this company deserve to stay in business? Don't its employees deserve to keep their jobs? I'm not talking about just giving them an extra $5,000 for nothing in return. I'm talking about paying them a decent price for the product they sell - a price that is large enough to sustain this company and prevent it from going bankrupt. Is that too much to ask?

Most people, surprisingly enough, do not think this way when they make purchasing decisions as consumers. Yet many of these same people expect employers to do so when they make hiring decisions. Why the discrepancy? It is not the employer's fault that the employee has not developed adequate skills to make a "living wage". But at the same time, it is not the consumer's fault that the Korean car company is about to go out of business. Certainly, as fellow human beings we should feel compassion for other people's misfortune, and help out where we can. But employers have no more of a responsibility to be virtuous than anyone else. The role of managers qua managers is simply to make a profit, and they do that by hiring labor at the point where an additional unit of labor has a marginal value equal to or exceeding marginal cost, but not below, just as the role of consumers is to purchase products at the point where the marginal utility of those products is greater than or equal to their marginal cost, but not below. The role of managers qua virtuous people may be to help others in need, but not at the expense of shirking their responsibility to shareholders.

Note that I am not addressing the notion that charity is a social responsibility or moral obligation. I will save that argument for another day. Rather, I am merely focusing on the specific obligations of an employer. Even if it is the case that workers deserve a living wage, it does not follow that employers have a special obligation to provide them with one. It may very well be the case that all members of society have an equal responsibility to provide living wages to workers, but there is no reason to think that this obligation should fall specifically - or even, unequally - on employers. Employers have no greater obligation to give to charity than anyone else.

Share this

Micha, My reaction to a

Micha,

My reaction to a 'living wage' is as follows :

Ignorance is a universal, communicable disease. Suffering from it is an unfortunate fact of life, but deliberately spreading it for political gain is a crime against humanity.

I found "living wage"

I found "living wage" proposals particularly galling at the state university I once attended. A state university already has a progressive mission - providing quality education to those who otherwise could not afford it. It bests serves the interests of the poor by fulfilling its mission as efficiently as possible. Paying the custodial staff an additional, say, $1 million per year as an act of charity seems magnanimous, but that $1 million could be better spent on classes, classroom buildings, libraries, computing centers, and student programs, all of which make a vast impact on the lives of the state's poor.

When it comes to the "living wage" as government policy, I find most of its proponents are easily swayed to the idea that "after-market" redistribution schemes such as the EITC - not that I necessarily approve of them, mind you - accomplish the same goal while not distorting the labor market as drastically.

Digamma, If only that was

Digamma,

If only that was the case with me. I've found just the opposite in fact; rarely do proponents of living wage laws accept the argument that earned income tax credits achieve the same results with less market distortions. Perhaps this is simply a result of politics - they do not believe that a conservative or libertarian would actually propose something that matches their desired results. Or, it could be because of pragmatic political reasoning - it is easier for pundits to argue against welfare than minimum wage laws, even though they are both basically the same with respect to redistribution. It is difficult to make arguments which rely on an understanding of economics, even when this understanding need only be minimal. For the same reasons, even people who know better support fuel economy standards like CAFE even though higher gas taxes would achieve the same results with less market distortions. These people argue that raising gas taxes are a political non-starter.

IMHO, the whole living wage

IMHO, the whole living wage argument begins to fall apart at the onset when you ask someone to define a living wage, and then calculate that wage.

By the time you get to the economic consequences of the living wage there is nothing left for a rational person to defend. Of course, if the defenders of a living wage were interested in a rational discourse on the topic, the whole living wage idea would have already gone away.