Flood Up, Not Trickle Down!

Adopting a Living Wage Increases Profits, Reduces Taxes, and Benefits All

Extensive research has shown that increasing wages actually benefits the economy and helps businesses. The idea harkens back to economist John Maynard Keynes who first wrote about the downward spiral known as “the paradox of thrift.” If everyone cuts costs and saves their money, there are fewer sales, less profits, and less need for labor. Since more people are then laid off, this vicious cycle continues, eventually causing the economy to crash then stagnate as it did during the Great Depression.

In the big picture, all employees are someone’s customers. Keynes and others understood the “the circular flow of money” or “multiplier effect” of new money in an economy: If workers are paid more money, they will spend it (unlike investors who might ship it overseas to more lucrative investments or save it for better times.) The business that a worker spends it with will spend it with someone else who will spend it with someone else, and so on. This expansion continues until it comes back several-fold not only to the original person but to the whole economy. Thus, sales and profits increase substantially more than the cost of the wage increase, which makes living wage a profitable investment.  Paying a living wage has to be law so everyone has to do it, otherwise the long-term thinking companies will lose out to short-sighted, “cut-throat” businesses.

Though many capitalists support the principal of trickle-down economics (when a business earns more profits, the company will invest these profits in labor, which will boost the economy), many economists, including contemporary economist and writer Jeremy Rifkin flatly dispute the concept: “In a world where technology advances have dramatically increased productivity and material output while marginalizing or eliminating millions of workers from the economic process, trickle-down technology appears naïve, even foolish.”

Rifkin goes on to describe how, in the past, each time new technologies have replaced workers in a given sector, new kinds of job sectors have emerged to replace them. But now, he writes, “All three traditional sectors of the economy—agriculture, manufacturing and service—are experiencing technological displacement, forcing millions onto the unemployment rolls. The only new sector emerging is the knowledge sector, made up of a small elite of entrepreneurs, scientists, technicians, computer programmers, professionals, educators, and consultants.” This sector, while growing, won’t be able to absorb the hundreds of millions of jobs that will be eliminated over the next decades. Those expected to be the hardest hit: The`working class’. 

During the debate about the last increase in the federal minimum wage to $5.15 per hour, conservatives alleged that a rise in the minimum wage would plunge the nation into recession. Instead, following the adoption of the higher minimum wage, the American economy enjoyed the largest period of expansion in its history.

According to the Living Wage Campaign, 79 different cities have adopted a Living Wage including Los Angeles, Boston, Chicago, and San Francisco. The non-partisan Public Policy Institute examined 36 of the cities with Living Wage ordinances. Author of the report, economist David Newmark said, “wage increases make it less likely that families with a living-wage worker will live in poverty. When employees earn a living wage, they are able to buy more goods and services in the community, pay more taxes, and rely less on public assistance in the form of medical care and housing subsidies. They are less likely to commit crimes thus reducing taxes needed for the criminal justice system.” Although the living wage ordinances studied applied only to public employees, it is predicted that the same benefits would carry over to the entire population.

Moreover, according to business owners, a living wage produces a more reliable workforce, less absenteeism, increased productivity and less turnover–which reduces training and recruitment costs--thereby increasing profits. Labor is such a small percentage of total business expenditures that raising wages has little negative impact on total growth.

Living wage ordinances have not resulted in higher unemployment rates or economic depression in these cities as skeptics feared. In fact, the living wage movement has been shown to increase profits and employment, reduce poverty, reduce dependency on government aid (thereby reducing taxes), and increase funding for new technology.

The Living Wage is the wage a worker would have to make to support a family above the poverty line. In most communities in the U.S. today, there exists a huge gap between a living wage and the minimum wage — this means a great number of people working full time or more, or forced to work more than one job, yet living in poverty.

The real value of the minimum wage, adjusted for inflation, has declined more than 30% since 1979, according the Economic Policy Institute. If you think about it, no one can justify paying less than the amount necessary to live, since that must eventually eliminate the trained worker. Moreover, his or her training is an investment lost by the business--that then must incur the cost of training someone new.