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Saturday, April 6, 2019

Microeconomics

From Wikipedia, the free encyclopedia

Microeconomics (from Greek prefix mikro- meaning "small" + economics) is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.
 
One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations. It also analyzes market failure, where markets fail to produce efficient results.

Microeconomics stands in contrast to macroeconomics, which involves "the sum total of economic activity, dealing with the issues of growth, inflation, and unemployment and with national policies relating to these issues". Microeconomics also deals with the effects of economic policies (such as changing taxation levels) on microeconomic behavior and thus on the aforementioned aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theories has been built upon microfoundations—i.e. based upon basic assumptions about micro-level behavior.

Assumptions and definitions

Microeconomic theory typically begins with the study of a single rational and utility maximizing individual. To economists, rationality means an individual possesses stable preferences that are both complete and transitive

The technical assumption that preference relations are continuous is needed to ensure the existence of a utility function. Although microeconomic theory can continue without this assumption, it would make comparative statics impossible since there is no guarantee that the resulting utility function would be differentiable.

Microeconomic theory progresses by defining a competitive budget set which is a subset of the consumption set. It is at this point that economists make the technical assumption that preferences are locally non-satiated. Without the assumption of LNS (local non-satiation) there is no 100% guarantee but there would be a rational rise in individual utility. With the necessary tools and assumptions in place the utility maximization problem (UMP) is developed. 

The utility maximization problem is the heart of consumer theory. The utility maximization problem attempts to explain the action axiom by imposing rationality axioms on consumer preferences and then mathematically modeling and analyzing the consequences. The utility maximization problem serves not only as the mathematical foundation of consumer theory but as a metaphysical explanation of it as well. That is, the utility maximization problem is used by economists to not only explain what or how individuals make choices but why individuals make choices as well. 

The utility maximization problem is a constrained optimization problem in which an individual seeks to maximize utility subject to a budget constraint. Economists use the extreme value theorem to guarantee that a solution to the utility maximization problem exists. That is, since the budget constraint is both bounded and closed, a solution to the utility maximization problem exists. Economists call the solution to the utility maximization problem a Walrasian demand function or correspondence. 

The utility maximization problem has so far been developed by taking consumer tastes (i.e. consumer utility) as the primitive. However, an alternative way to develop microeconomic theory is by taking consumer choice as the primitive. This model of microeconomic theory is referred to as revealed preference theory. 

The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts a right-shift in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new market-clearing equilibrium point on the supply curve (S).
 
The theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods and services. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices. Quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the theory works well in situations meeting these assumptions. 

Mainstream economics does not assume a priori that markets are preferable to other forms of social organization. In fact, much analysis is devoted to cases where market failures lead to resource allocation that is suboptimal and creates deadweight loss. A classic example of suboptimal resource allocation is that of a public good. In such cases, economists may attempt to find policies that avoid waste, either directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating "missing markets" to enable efficient trading where none had previously existed. 

This is studied in the field of collective action and public choice theory. "Optimal welfare" usually takes on a Paretian norm, which is a mathematical application of the Kaldor–Hicks method. This can diverge from the Utilitarian goal of maximizing utility because it does not consider the distribution of goods between people. Market failure in positive economics (microeconomics) is limited in implications without mixing the belief of the economist and their theory.

The demand for various commodities by individuals is generally thought of as the outcome of a utility-maximizing process, with each individual trying to maximize their own utility under a budget constraint and a given consumption set.

Basic microeconomic concepts

The study of microeconomics involves several "key" areas:

Demand, supply, and equilibrium

Supply and demand is an economic model of price determination in a perfectly competitive market. It concludes that in a perfectly competitive market with no externalities, per unit taxes, or price controls, the unit price for a particular good is the price at which the quantity demanded by consumers equals the quantity supplied by producers. This price results in a stable economic equilibrium.

Measurement of elasticities

Elasticity is the measurement of how responsive an economic variable is to a change in another variable. Elasticity can be quantified as the ratio of the change in one variable to the change in another variable, when the later variable has a causal influence on the former. It is a tool for measuring the responsiveness of a variable, or of the function that determines it, to changes in causative variables in unitless ways. Frequently used elasticities include price elasticity of demand, price elasticity of supply, income elasticity of demand, elasticity of substitution or constant elasticity of substitution between factors of production and elasticity of intertemporal substitution.

Consumer demand theory

Consumer demand theory relates preferences for the consumption of both goods and services to the consumption expenditures; ultimately, this relationship between preferences and consumption expenditures is used to relate preferences to consumer demand curves. The link between personal preferences, consumption and the demand curve is one of the most closely studied relations in economics. It is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility subject to consumer budget constraints.

Theory of production

Production theory is the study of production, or the economic process of converting inputs into outputs. Production uses resources to create a good or service that is suitable for use, gift-giving in a gift economy, or exchange in a market economy. This can include manufacturing, storing, shipping, and packaging. Some economists define production broadly as all economic activity other than consumption. They see every commercial activity other than the final purchase as some form of production.

Costs of production

The cost-of-production theory of value states that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production: labour, capital, land, entrepreneur. Technology can be viewed either as a form of fixed capital (e.g. plant) or circulating capital (e.g. intermediate goods). 

In the mathematical model for the cost of production, the short-run total cost is equal to fixed cost plus total variable cost. The fixed cost refers to the cost that is incurred regardless of how much the firm produces. The variable cost is a function of the quantity of an object being produced.

Opportunity cost

The economic idea of opportunity cost is closely related to the idea of time constraints. You can do only one thing at a time, which means that, inevitably, you’re always giving up other things. 

The opportunity cost of any activity is the value of the next-best alternative thing you may have done instead. Opportunity cost depends only on the value of the next-best alternative. It doesn’t matter whether you have 5 alternatives or 5,000.

Opportunity costs can tell you when not to do something as well as when to do something. For example, you may like waffles, but you like chocolate even more. If someone offers you only waffles, you’re going to take it. But if you’re offered waffles or chocolate, you’re going to take the chocolate. The opportunity cost of eating waffles is sacrificing the chance to eat chocolate. Because the cost of not eating the chocolate is higher than the benefits of eating the waffles, it makes no sense to choose waffles. Of course, if you choose chocolate, you’re still faced with the opportunity cost of giving up having waffles. But you’re willing to do that because the waffle's opportunity cost is lower than the benefits of the chocolate. Opportunity costs are unavoidable constraints on behaviour because you have to decide what’s best and give up the next-best alternative.

Market structure

The market structure can have several types of interacting market systems. Different forms of markets are a feature of capitalism and market socialism, with advocates of state socialism often criticizing markets and aiming to substitute or replace markets with varying degrees of government-directed economic planning

Competition acts as a regulatory mechanism for market systems, with government providing regulations where the market cannot be expected to regulate itself. One example of this is with regards to building codes, which if absent in a purely competition regulated market system, might result in several horrific injuries or deaths to be required before companies would begin improving structural safety, as consumers may at first not be as concerned or aware of safety issues to begin putting pressure on companies to provide them, and companies would be motivated not to provide proper safety features due to how it would cut into their profits. 

Some examples of markets:

Perfect competition

Perfect competition is a situation in which numerous small firms producing identical products compete against each other in a given industry. Perfect competition leads to firms producing the socially optimal output level at the minimum possible cost per unit. Firms in perfect competition are "price takers" (they do not have enough market power to profitably increase the price of their goods or services). A good example would be that of digital marketplaces, such as eBay, on which many different sellers sell similar products to many different buyers. Consumers in a perfect competitive market have perfect knowledge about the products that are being sold in this market.

Imperfect competition

In economic theory, imperfect competition is a type of market structure showing some but not all features of competitive markets.

Monopolistic competition

Monopolistic competition is a situation in which many firms with slightly different products compete. Production costs are above what may be achieved by perfectly competitive firms, but society benefits from the product differentiation. Examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities.

Monopoly

A monopoly is a market structure in which a market or industry is dominated by a single supplier of a particular good or service. Because monopolies have no competition they tend to sell goods and services at a higher price and produce below the socially optimal output level. However, not all monopolies are a bad thing, especially in industries where multiple firms would result in more costs than benefits (i.e. natural monopolies).
  • Natural monopoly: A monopoly in an industry where one producer can produce output at a lower cost than many small producers.

Oligopoly

An oligopoly is a market structure in which a market or industry is dominated by a small number of firms (oligopolists). Oligopolies can create the incentive for firms to engage in collusion and form cartels that reduce competition leading to higher prices for consumers and less overall market output. Alternatively, oligopolies can be fiercely competitive and engage in flamboyant advertising campaigns.
  • Duopoly: A special case of an oligopoly, with only two firms. Game theory can elucidate behavior in duopolies and oligopolies.

Monopsony

A monopsony is a market where there is only one buyer and many sellers.

Oligopsony

An oligopsony is a market where there are a few buyers and many sellers.

Game theory

Game theory is a major method used in mathematical economics and business for modeling competing behaviors of interacting agents. The term "game" here implies the study of any strategic interaction between people. Applications include a wide array of economic phenomena and approaches, such as auctions, bargaining, mergers & acquisitions pricing, fair division, duopolies, oligopolies, social network formation, agent-based computational economics, general equilibrium, mechanism design, and voting systems, and across such broad areas as experimental economics, behavioral economics, information economics, industrial organization, and political economy.

Labor economics

Labor economics seeks to understand the functioning and dynamics of the markets for wage labor. Labor markets function through the interaction of workers and employers. Labor economics looks at the suppliers of labor services (workers), the demands of labor services (employers), and attempts to understand the resulting pattern of wages, employment, and income. In economics, labor is a measure of the work done by human beings. It is conventionally contrasted with such other factors of production as land and capital. There are theories which have developed a concept called human capital (referring to the skills that workers possess, not necessarily their actual work), although there are also counter posing macro-economic system theories that think human capital is a contradiction in terms.

Welfare economics

Welfare economics is a branch of economics that uses microeconomics techniques to evaluate well-being from allocation of productive factors as to desirability and economic efficiency within an economy, often relative to competitive general equilibrium. It analyzes social welfare, however measured, in terms of economic activities of the individuals that compose the theoretical society considered. Accordingly, individuals, with associated economic activities, are the basic units for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units.

Economics of information

Information economics or the economics of information is a branch of microeconomic theory that studies how information and information systems affect an economy and economic decisions. Information has special characteristics. It is easy to create but hard to trust. It is easy to spread but hard to control. It influences many decisions. These special characteristics (as compared with other types of goods) complicate many standard economic theories.

Applied

United States Capitol Building: meeting place of the United States Congress, where many tax laws are passed, which directly impact economic welfare. This is studied in the subject of public economics.
 
Applied microeconomics includes a range of specialized areas of study, many of which draw on methods from other fields. Industrial organization examines topics such as the entry and exit of firms, innovation, and the role of trademarks. Labor economics examines wages, employment, and labor market dynamics. Financial economics examines topics such as the structure of optimal portfolios, the rate of return to capital, econometric analysis of security returns, and corporate financial behavior. Public economics examines the design of government tax and expenditure policies and economic effects of these policies (e.g., social insurance programs). Political economy examines the role of political institutions in determining policy outcomes. Health economics examines the organization of health care systems, including the role of the health care workforce and health insurance programs. Education economics examines the organization of education provision and its implication for efficiency and equity, including the effects of education on productivity. Urban economics, which examines the challenges faced by cities, such as sprawl, air and water pollution, traffic congestion, and poverty, draws on the fields of urban geography and sociology. Law and economics applies microeconomic principles to the selection and enforcement of competing legal regimes and their relative efficiencies. Economic history examines the evolution of the economy and economic institutions, using methods and techniques from the fields of economics, history, geography, sociology, psychology, and political science.

Living wage

From Wikipedia, the free encyclopedia
Cost of a basic but decent life for a family.
 
A living wage is the minimum income necessary for a worker to meet their basic needs. Needs are defined to include food, housing, and other essential needs such as clothing. The goal of a living wage is to allow a worker to afford a basic but decent standard of living. Due to the flexible nature of the term "needs", there is not one universally accepted measure of what a living wage is and as such it varies by location and household type.

A living wage, in some nations such as the United Kingdom and New Zealand, generally means that a person working 40 hours a week, with no additional income, should be able to afford the basics for a modest but decent life, such as, food, shelter, utilities, transport, health care, and child care. Living wage advocates have further defined a living wage as the wage equivalent to the poverty line for a family of four. The income would have to allow the family to 'secure food, shelter, clothing, health care, transportation and other necessities of living in modern society'. A definition of a living wage used by the Greater London Authority (GLA) is the threshold wage, calculated as an income of 60% of the median, and an additional 15% to allow for unforeseen events.

Calculating a living wage
 
The living wage differs from the minimum wage in that the latter is set by national law and can fail to meet the requirements to have a basic quality of life which leaves the family to rely on government programs for additional income. Living wages, on the other hand, have typically only been adopted in municipalities. In economic terms, the living wage is similar to the minimum wage as it is a price floor for labor. 

In the 1990s, the first contemporary living wage campaigns were launched by community initiatives in the US addressing increasing poverty faced by workers and their families. They argued that the employee, employer, and community all benefited with a living wage. Employees would be more willing to work, helping the employer reduce worker turnover, and it would help the community when the citizens have enough to have a decent life. These campaigns came about partially as a response to Reaganomics and Thatcherism in the US and UK, respectively, which shifted macroeconomic policy towards neoliberalism. A living wage, by increasing the purchasing power of low income workers, is supported by Keynesian and post-Keynesian economics which focuses on stimulating demand in order to improve the state of the economy.

History

 
 
The concept of a living wage, though it was not defined as such, can be traced back to the works of ancient Greek philosophers such as Plato and Aristotle. Both argued for an income that considers needs, particularly those that ensure the communal good. Aristotle saw self-sufficiency as a requirement for happiness which he defined as, ‘that which on its own makes life worthy of choice and lacking in nothing’. As he placed the responsibility in ensuring that the poor could earn a sustainable living in the state, his ideas are seen as an early example of support for a living wage. The evolution of the concept can be seen later on in medieval scholars such as Thomas Aquinas who argued for a 'just wage'. The concept of a just wage was related to that of just prices, which were those that allowed everyone access to necessities. Prices and wages that prevented access to necessities were considered unjust as they would imperil the virtue of those without access.

In Wealth of Nations, Adam Smith recognized that rising real wages lead to the "improvement in the circumstances of the lower ranks of people" and are therefore an advantage to society. Growth and a system of liberty were the means by which the laboring poor were able to secure higher wages and an acceptable standard of living. Rising real wages are secured by growth through increasing productivity against stable price levels, i.e. prices not affected by inflation. A system of liberty, secured through political institutions whereupon even the "lower ranks of people" could secure the opportunity for higher wages and an acceptable standard of living.
Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconvenience to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed and lodged.
— Adam Smith, Wealth of Nations, I .viii.36
Based on these writings, Smith advocated that labor should receive an equitable share of what labor produces. For Smith, this equitable share amounted to more than subsistence. Smith equated the interests of labor and the interests of land with overarching societal interests. He reasoned that as wages and rents rise, as a result of higher productivity, societal growth will occur thus increasing the quality of life for the greater part of its members.

Like Smith, supporters of a living wage argue that the greater good for society is achieved through higher wages and a living wage. It is argued that government should in turn attempt to align the interests of those pursuing profits with the interests of the labor in order to produce societal advantages for the majority of society. Smith argued that higher productivity and overall growth led to higher wages that in turn led to greater benefits for society. Based on his writings, one can infer that Smith would support a living wage commensurate with the overall growth of the economy. This, in turn, would lead to more happiness and joy for people, while helping to keep families and people out of poverty. Political institutions can create a system of liberty for individuals to ensure opportunity for higher wages through higher production and thus stable growth for society. 

In 1891, Pope Leo XIII issued a papal bull entitled Rerum novarum, which is considered the Catholic Church's first expression of a view supportive of a living wage. The church recognized that wages should be sufficient to support a family. This position has been widely supported by the church since that time, and has been reaffirmed by the papacy on multiple occasions, such as by Pope Pius XI in 1931 Quadragesimo anno and again in 1961, by Pope John XXIII writing in the encyclical Mater et magistra. More recently, Pope John Paul II wrote, "Hence in every case a just wage is the concrete means of verifying the whole socioeconomic system and, in any case, of checking that it is functioning justly."

Contemporary thought

Everyone who works has the right to just and favourable remuneration ensuring for himself and for his family an existence worthy of human dignity. Universal Declaration of Human Rights, Art. 23 Sec. 3

Different ideas on a living wage have been advanced by modern campaigns that have pushed for localities to adopt them. Supporters of a living wage have argued that a wage is more than just compensation for labour. It is a means of securing a living and it leads to public policies that address both the level of the wage and its decency. Contemporary research by Andrea Werner and Ming Lim has analyzed the works of John Ryan, Jerold Waltman and Donald Stabile for their philosophical and ethical insights on a living wage.

John Ryan argues for a living wage from a rights perspective. He considers a living wage to be a right that all labourers are entitled to from the 'common bounty of nature'. He argues that private ownership of resources precludes access to them by others who would need them to maintain themselves. As such, the obligation to fulfill the right of a living wage rests on the owners and employers of private resources. His argument goes beyond that a wage should provide mere subsistence but that it should provide humans with the capabilities to 'develop within reasonable limits all [their] faculties, physical, intellectual, moral and spiritual.' A living wage for him is 'the amount of remuneration that is sufficient to maintain decently the laborer'. 

Jerold Waltman, in A Case for the Living Wage, argues for a living wage not based on individual rights but from a communal, or 'civic republicanism', perspective. He sees the need for citizens to be connected to their community, and thus, sees individual and communal interests as inseparably bound. Two major problems that are antithetical to civic republicanism are poverty and inequality. A living wage is meant to address these by providing the material basis that allows individuals a degree of autonomy and prevents disproportionate income and wealth that would inevitably lead to a societal fissure between the rich and poor. A living wage further allows for political participation by all classes of people which is required to prevent the political interests of the rich from undermining the needs of the poor. These arguments for a living wage, taken together, can be seen as necessary elements for 'social sustainability and cohesion'.

Waiting for a living wage poster (1913)
 
Donald Stabile argues for a living wage based on moral economic thought and its related themes of sustainability, capability and externality. Broadly speaking, Stabile indicates that sustainability in the economy may require that people have the means for 'decent accommodation, transport, clothing and personal care'. He qualifies the statement as he sees individual necessities as contextual and therefore able to change over time, between cultures and under different macroeconomic circumstances. This suggests that the concept and definition of a living wage cannot be made objective over all places and in all times. Stabile's thoughts on capabilities make direct reference to Amartya Sen's work on capability approach. The tie-in with a living wage is the idea that income is an important, though not exclusive, means for capabilities. The enhancement of people's capabilities allows them to better function both in society and as workers. These capabilities are further passed down from parents to children. Finally, Stabile analyses the lack of a living wage as the imposition of negative externalities on others. These externalities take the form of depleting the stock of workers by 'exploiting and exhausting the workforce'. This leads to economic inefficiency as businesses end up overproducing their products due to not paying the full cost of labour.

Other contemporary accounts have taken up the theme of externalities arising due to a lack of living wage. Muilenburg and Singh see welfare programs, such as housing and school meals, as being a subsidy for employers that allow them to pay low wages. This subsidy, taking the form of an externality, is of course paid for by society in the form of taxes. This thought is repeated by Grimshaw who argues that employers offset the social costs of maintaining their workforce through tax credits, housing, benefits and other wage subsidies. The issue was raised during the Democratic party primary election of 2016 in the United States, when presidential candidate Bernie Sanders mentioned that "struggling working families should not have to subsidise the wealthiest family in the country", and therefore, implied that the large retailer Walmart, who is owned by the wealthiest family in the country, was not paying fair wages and was being subsidised by taxpayers.

Implementations

Australia

Living wage inquiry in Sydney, Australia. (1935)
 
In Australia, the 1907 Harvester Judgement ruled that an employer was obliged to pay his employees a wage that guaranteed them a standard of living which was reasonable for "a human being in a civilised community" to live in "frugal comfort estimated by current... standards," regardless of the employer's capacity to pay. Justice Higgins established a wage of 7/- (7 shillings) per day or 42/- per week as a 'fair and reasonable' minimum wage for unskilled workers. The judgement was later overturned but remains influential. From the Harvester Judgement arose the Australian industrial concept of the "basic wage". For most skilled workers, in addition to the basic wage they received a margin on top of the basic wage, in proportion to a court or commission's judgement of a group of worker's skill levels. In 1913, to compensate for the rising cost of living, the basic wage was increased to 8/- per day, the first increase since the minimum was set. The first Retail Price Index in Australia was published late in 1912, the A Series Index. From 1934, the basic wage was indexed against the C Series Index of household prices. The concept of a basic wage was repeatedly challenged by employer groups through the Basic wage cases and Metal Trades Award cases where the employers argued that the basic wage and margin ought to be replaced by a "total wage". The basic wage system remained in place in Australia until 1967. It was also adopted by some state tribunals and was in use in some states during the 1980s.

Bangladesh

In Bangladesh salaries are among the lowest in the world. During 2012 wages hovered around US$38 per month depending on the exchange rate. Studies by Professor Doug Miller during 2010 to 2012, has highlighted the evolving global trade practices in Towards Sustainable Labour Costing in UK Fashion Retail. This white paper published in 2013 by University of Manchester, appears to suggest that the competition among buying organisation has implications to low wages in countries such as Bangladesh. It has laid down a road map to achieve sustainable wages.

United Kingdom

Living Wage
Select Countries (2017)
Country Hourly (LCU)
Hourly (US$)
Canada

Calgary
Toronto
Vancouver
C$18.15
C$18.52
C$20.91
$13.96
$14.25
$16.08
Ireland

National €11.90 $13.42
New Zealand

National NZ$20.50 $14.54
United Kingdom

National
London
£8.75
£10.20
$11.22
$13.08
United States

National
Los Angeles
New York City
San Francisco
$16.07
$18.95
$21.55
$23.79
$16.07
$18.95
$21.55
$23.79

Municipal regulation of wage levels began in some towns in the United Kingdom in 1524. National minimum wage law began with the Trade Boards Act 1909, and the Wages Councils Act 1945 set minimum wage standards in many sectors of the economy. Wages Councils were abolished in 1993 and subsequently replaced with a single statutory national minimum wage by the National Minimum Wage Act 1998, which is still in force. The rates are reviewed each year by the country's Low Pay Commission. From 1 April 2016 the minimum wage has been paid as a mandatory National Living Wage for workers over 25. It is being phased in between 2016 and 2020 and is set at a significantly higher level than previous minimum wage rates. By 2020 it is expected to have risen to at least £9 per hour and represent a full-time annual pay equivalent to 60% of the median UK earnings. The National Living Wage is nevertheless lower than the value of the Living Wage calculated by the Living Wage Foundation. Some organisations voluntarily pay a living wage to their staff, at a level somewhat higher than the statutory level. From September 2014 all NHS Wales staff have been paid a minimum of the "living wage" recommended by the Living Wage Commission. About 2,400 employees received an initial salary increase of up to £470 above the UK-wide Agenda for Change rates.

United States

In the United States, the state of Maryland and several municipalities and local governments have enacted ordinances which set a minimum wage higher than the federal minimum that requires all jobs to meet the living wage for that region. This usually works out to be $3 to $7 above the federal minimum wage. However, San Francisco, California and Santa Fe, New Mexico have notably passed very wide-reaching living wage ordinances. U.S. cities with living wage laws include Santa Fe and Albuquerque in New Mexico; San Francisco, California; and Washington, D.C.[36] The city of Chicago, Illinois also passed a living wage ordinance in 2006, but it was vetoed by Mayor Richard M. Daley. Living wage laws typically cover only businesses that receive state assistance or have contracts with the government.

This effort began in 1994 when an alliance between a labor union and religious leaders in Baltimore launched a successful campaign requiring city service contractors to pay a living wage. Subsequent to this effort, community advocates have won similar ordinances in cities such as Boston, Los Angeles, San Francisco, and St. Louis. In 2007, there were at least 140 living wage ordinances in cities throughout the United States and more than 100 living wage campaigns underway in cities, counties, states, and college campuses. In 2014, Wisconsin Service Employees International Union teamed up with public officials against legislation to eliminate local living wages. According to U.S. Department of Labor data, Wisconsin Jobs Now - a non-profit organization fighting inequality through higher wages - has received at least $2.5 million from SEIU organizations from 2011 to 2013.

Although these ordinances are recent, a number of studies have attempted to measure the impact of these policies on wages and employment. Researchers have had difficulty measuring the impact of these policies because it is difficult to isolate a control group for comparison. A notable study defined the control group as the subset of cities that attempted to pass a living wage law but were unsuccessful. This comparison indicates that living wages raise the average wage level in cities, however, it reduces the likelihood of employment for individuals in the bottom percentile of wage distribution.

Impact

Research shows that minimum wage laws and living wage legislation impact poverty differently: evidence demonstrates that living wage legislation reduces poverty. The parties impacted by minimum wage laws and living wage laws differ as living wage legislation generally applies to a more limited sector of the population. It is estimated that workers who qualify for the living wage legislation are currently between 1-2% of the bottom quartile of wage distribution. One must consider that the impact of living wage laws depends heavily on the degree to which these ordinances are enforced.

Neumark and Adams, in their paper, "Do living wage ordinances reduce urban poverty?", state, "There is evidence that living wage ordinances modestly reduce the poverty rates in locations in which these ordinances are enacted. However, there is no evidence that state minimum wage laws do so."

A study carried out in Hamilton, Canada by Zeng and Honig indicated that living wage workers have higher affective commitment and lower turnover intention. Workers paid a living wage were more likely to support the organization they work for in various ways including: "protecting the organizations public image, helping colleagues solve problems, improving their skills and techniques, providing suggestions or advice to a management team, and caring about the organization." The authors interpret these finding through social exchange theory, which points out the mutual obligation employers and employees feel towards each other when employees perceive they are provided favorable treatment.

The current minimum national minimum wage in the United States, does not support a livable wage for the employees. Due to the fact that they are underpaid, the reliance on federal and state aid is inflated. It is estimated that if there would be a savings of approximately 18 billion dollars in federal aid if the minimum wage was raised to 12 dollars an hour. Some of the other benefits to the employees would be increased self-esteem and job satisfaction, which would also trickle down to the children of those workers. These children would see improved social environments and perhaps more success at school due to this support. With the increase in wage, the employee would also have an increased buying power which would help stimulate the economy and create more jobs.

Living wage estimates

As of 2003, there are 122 living wage ordinances in American cities and an additional 75 under discussion. Article 23 of the United Nations Universal Declaration of Human Rights states that "Everyone who works has the right to just and favourable remuneration ensuring for himself and for his family an existence worthy of human dignity." 

In addition to legislative acts, many corporations have adopted voluntary codes of conduct. The Sullivan Principles in South Africa are an example of a voluntary code of conduct which state that firms should compensate workers to at least cover their basic needs.

In the table below, cross national comparable living wages were estimated for twelve countries and reported in local currencies and purchasing power parity (PPP). Living wage estimates for the year 2000 range from US $1.7 PPP per hour, in low-income examples, to approximately US$11.6 PPP per hour, in high-income examples.

Country One full-time worker (four person household) Average number of full-time worker equivalents in country (four person household) One full-time worker (household size varies by country) Average number of full-time worker equivalents in each country
Bangladesh 1.61 1.14 2.02 1.44
India 1.55 1.32 1.79 1.52
Zimbabwe 2.43 1.70 3.18 2.22
Low income average 1.86 1.39 2.33 1.72
Armenia 3.03 2.05 2.52 1.70
Ecuador 1.94 1.74 2. 23 2.01
Egypt 1.96 1.77 2.45 2.21
China 2.08 1.47 1.95 1.38
South Africa 3.10 2.60 3.35 2.81
Lower middle income average 2.42 1.93 2.50 2.02
Lithuania 4.62 3.21 3.97 2.76
Costa Rica 3.68 3.38 3.90 3.58
Upper middle income average 4.14 3.30 3.94 3.17
United States 13.10 11.00 13.36 11.23
Switzerland 16.41 13.23 14.76 11.91
High income average 14.75 12.10 14.06 11.57

Living wage movements

Living Wage Foundation

Workers protesting for a living wage in London, United Kingdom. (2017)
 
The Living Wage Campaign in the United Kingdom originated in London, where it was launched in 2001 by members of the community organisation London Citizens (now Citizens UK). It engaged in a series of Living Wage campaigns and in 2005 the Greater London Authority established the Living Wage Unit to calculate the London Living Wage, although the authority had no power to enforce it. The London Living Wage was developed in 2008 when Trust for London awarded a grant of over £1 million for campaigning, research and an employer accreditation scheme. The Living Wage campaign subsequently grew into a national movement with local campaigns across the UK. The Joseph Rowntree Foundation funded the Centre for Research in Social Policy (CRSP) at Loughborough University to calculate a UK-wide Minimum Income Standard (MIS) figure, an average across the whole of the UK independent of the higher living costs in London. 

In 2011 the CRSP used the MIS as the basis for developing a standard model for setting the UK Living Wage outside of London. Citizens UK, a nationwide community organising institution developed out of London Citizens, launched the Living Wage Foundation and Living Wage Employer mark. Since 2011, the Living Wage Foundation has accredited over 1,800 employers that pay its proposed living wage. The living wage in London is calculated by GLA Economics and the CRSP calculates the out-of-London Living Wage. Their recommended rates for 2015 are £9.40 for London and £8.25 for the rest of the UK. These rates are updated annually in November. In January 2016 the Living Wage Foundation set up a new Living Wage Commission to oversee the calculation of the Living Wage rates in the UK.

In 2012, research into the costs and benefits of a living wage in London was funded by the Trust for London and carried out by Queen Mary University of London. Further research was published in 2014 in a number of reports on the potential impact of raising the UK's statutory national minimum wage to the same level as the Living Wage Foundation's living wage recommendation. This included two reports funded by the Trust for London and carried out by the Institute for Public Policy Research (IPPR) and Resolution Foundation: "Beyond the Bottom Line" and "What Price a Living Wage?" Additionally, Landman Economics published "The Economic Impact of Extending the Living Wage to all Employees in the UK".

A 2014 report by the Living Wage Commission, chaired by Doctor John Sentamu, the Archbishop of York, recommended that the UK government should pay its own workers a "living wage", but that it should be voluntary for the private sector. Data published in late 2014 by New Policy Institute and Trust for London found 20% of employees in London were paid below the Living Wage Foundation's recommended living wage between 2011 and 2013. The proportion of residents paid less than this rate was highest in Newham (37%) and Brent (32%). Research by the Office for National Statistics in 2014 indicated that at that time the proportion of jobs outside London paying less than the living wage was 23%. The equivalent figure within London was 19%. Research by Loughborough University, commissioned by Trust for London, shows 4 in 10 Londoners cannot afford a decent standard of living - that is one that allows them to meet their basic needs and participate in society at a minimum level. This is significantly higher than the 30% that fall below the standard in the UK as a whole. This represents 3.5 million Londoners, an increase of 400,000 since 2010/11. The research highlights the need to improve incomes through better wages, mainly, the London Living Wage, to ensure more Londoners reach a decent standard of living.

Ed Miliband, the leader of the Labour Party in opposition from 2010 until 2015, supported a living wage and proposed tax breaks for employers who adopted it. The Labour Party has implemented a living wage in some local councils which it controls, such as in Birmingham and Cardiff councils. The Green Party also supports the introduction of a living wage, believing that the national minimum wage should be 60% of net national average earnings. Sinn Féin also supports the introduction of a living wage for Northern Ireland. Other supporters include The Guardian newspaper columnist Polly Toynbee, Church Action on Poverty, the Scottish Low Pay Unit, and Bloomsbury Fightback!.

Living Wage Movement Aotearoa New Zealand

In New Zealand a new social movement, Living Wage Movement Aotearoa New Zealand, was formed in April 2013. It emerged from a loose network that launched a Living Wage Campaign in May 2012. In 2015 there were over 50 faith, union and community member organisations and by 2017 there were 90. 

In February 2013, independent research by the Family Centre Social Policy Research Unit identified the New Zealand Living Wage as $18.40 per hour. This was increased in 2014 to $18.80 per hour and by 2017 to $20.20 per hour. 

On July 1, 2014 the first accredited NZ Living Wage Employers were announced. The twenty businesses for 2014-15 included food manufacturing, social service agencies, community organisations, unions, and a restaurant. This number has now increased to 90 businesses, including the first corporate, Vector. Wellington City Council has committed to becoming an accredited Living Wage Employer and five other local government bodies, including Auckland Council, have taken their first steps toward implementing the Living Wage. In the election of September 2017 the three parties that form the Government have also committed to a Living Wage for employees and contracted workers to the core public service.

Asia Floor Wage

Launched in 2009, Asia Floor Wage is a loose coalition of labour and other groups seeking to implement a Living Wage throughout Asia, with a particular focus on textile manufacturing. There are member associations in Bangladesh, Cambodia, Hong Kong S.A.R., India, Indonesia, Malaysia, Pakistan, the Philippines, Sri Lanka, Thailand and Turkey as well as supporters in Europe and North America. The campaign targets multinational employers who do not pay their developing world workers a living wage.

United States living wage campaigns

New York City

March for a living wage in Seattle, United States. (2014)
 
The proposed law will inform tax-payers of where their investment dollars go and will hold developers to more stringent employment standards. The proposed act will require developers who receive substantial tax-payer funded subsidies to pay employees a minimum living wage. The law is designed to raise quality of life and stimulate local economy. Specifically the proposed act will guarantee that workers in large developmental projects will receive a wage of at least $10.00 an hour. The living wage will get indexed so that it keeps up with cost of living increases. Furthermore, the act will require that employees who do not receive health insurance from their employer will receive an additional $1.50 an hour to subsidize their healthcare expenses. Workers employed at a subsidized development will also be entitled to the living wage guarantee.

Many city officials have opposed living wage requirements because they believe that they restrict business climate thus making cities less appealing to potential industries. Logistically cities must hire employees to administer the ordinance. Conversely advocates for the legislation have acknowledged that when wages aren't sufficient, low-wage workers are often forced to rely on public assistance in the form of food stamps or Medicaid.

James Parrott of the Fiscal Policy Institute testified during a May 2011 New York City Council meeting that real wages for low-wage workers in the city have declined substantially over the last 20 years, despite dramatic increases in average education levels. A report by the Fiscal Policy Institute indicated that business tax subsidies have grown two and a half times faster than overall New York City tax collections and asks why these public resources are invested in poverty-level jobs. Mr. Parrott testified that income inequality in New York City exceeds that of other large cities, with the highest-earning 1 percent receiving 44 percent of all income.

Harvard University

Harvard University students began organizing a campaign to combat the issue of low living wages for Harvard workers beginning in 1998. After failed attempts to get a meeting with Harvard president Neil Rudenstine, The Living Wage Campaign began to take action. As the movement gained momentum, The Living Wage Campaign held rallies with the support of students, alumni, faculty, staff, community members and organizations. Most importantly, the rallies gained the support of the Harvard workers, strengthening the campaign's demands for a higher wage. After various measures trying to provoke change among the administration, the movement took its most drastic measure. Approximately fifty students occupied the office of the president and university administrators in 2001 for a three-week sit-in. While students were in the office of the president, supporters would sleep outside the building to show solidarity. At the end of the sit-in, dining hall workers were able to agree on a contract to raise the pay of workers. After the sit-in, The Living Wage Campaign sparked unions, contract and service workers to begin negotiating for fair wages.

Miami University

The Miami University Living Wage Campaign began after it became known that Miami University wage was 18-19% below the market value. In 2003 the members of the Miami University Fair Labor Coalition began marching for university staff wages. After negotiations failed between the university and the American Federation of State and County Municipal Employees (AFSCME), workers went on strike. For two weeks workers protested and students created a tent city as a way of showing support for the strikers. Eventually more students, faculty and community members came out to show support. Even the union president at the time also went on a hunger strike as another means of protesting wages. In late 2003 the union was able to make an agreement with the university for gradual raises totaling about 10.25%. There was still an ongoing push for Miami University to adopt a living wage policy.

Johns Hopkins University

Living wage protest and march in New York City (2015)
 
The Student Labor Action Committee (SLAC) of Johns Hopkins University took action by conducting a sit-in until the administration listen to their demands. In 1999, after a petition with thousands of signatures, Johns Hopkins University president, William R. Brody raised the hourly wage (to only $7.75) but did not include healthcare benefits nor would the wage adjust for inflation. The sit-in began in early 2000 to meet the demands of students for the university to adopt a living wage. A few weeks later, a settlement was made with the administration. SLAC now just ensures that the living wage policy is implemented.

Swarthmore College

Starting in 2000, the Living Wage and Democracy Campaign of Swarthmore College began as small meetings between students and staff to voice concerns about their wages. Over the next two years the Living Wage and Democracy Campaign voiced concerns to the university administration. As a response in 2002, the wage was increased from $6.66 to $9 an hour. While the campaigners were pleased with this first result, they believed the college still had a long way to go. The college president, Al Bloom created the Ad Hoc Committee to help learn what the living wage was and released a committee report. In the report suggested an hourly wage, childcare benefit, health coverage for employees and families.

University of Virginia

The Living Wage Campaign at the University of Virginia in Charlottesville, Virginia, composed of University students, faculty, staff, and community members, began in 1995 during the administration of University President John Casteen and continues under the administration of President Teresa Sullivan. The campaign has demanded that the university raise wages to meet basic standards of cost-of-living in the Charlottesville area, as calculated by the nonpartisan Economic Policy Institute.

In 2000, the campaign succeeded in persuading university administrators to raise the wage floor from $6.10 to $8.19; however, this wage only applied to direct employees, not contracted workers. In the spring of 2006, the campaign garnered national media attention when 17 students staged a sit-in in the university president's office in Madison Hall. A professor was arrested on the first day of the protest. The 17 students were arrested after 4 days of protest and later acquitted at trial.

Beginning in 2010, the campaign has staged a series of rallies and other events to draw attention to the necessity of the living wage for UVA employees. They have also met with members of the administration numerous times, including with the president. In making the argument for a living wage, the campaign has claimed that continuing to pay low wages is inconsistent with the University's values of the "Community of Trust." They have also noted that University President Sullivan's 2011 co-written textbook, The Social Organization of Work, states that, "Being paid a living wage for one's work is a necessary condition for self-actualization." After rallies and meetings in the spring of 2011, President Sullivan posted a "Commitment to Lowest-Paid Employees" on the University President's website including a letter addressed to the Campaign.

On February 8, 2012, the Campaign released a series of demands to University administrators calling for a living wage policy at the University. These demands included a requirement that the University "explicitly address" the issue by Feb. 17. Although University President Teresa Sullivan did respond to the demands in a mass email sent to the University community shortly before the end of the day on February 17, the Campaign criticized her response as "intentionally misleading" and vowed to take action.

On February 18, the campaign announced that 12 students would begin a hunger strike to publicize the plight of low-paid workers.

Criticism

Criticisms against the implementation living wage laws have taken similar forms to those against minimum wage. Economically, both can be analyzed as a price floor for labor. A price floor, if above the equilibrium price and thus effective, necessarily leads to a “surplus”. In the context of a labor market, this means that unemployment goes up as the number of employers willing to hire people at a “living wage” is below the number they would be willing to hire at the equilibrium wage price. As such, setting the minimum wage at a living wage has been criticized for possibly destroying jobs.

Critics have warned of not just an increase in unemployment but also price increases and a lack of entry level jobs due to ‘labor substitutions effects’. The voluntary undertaking of a living wage is criticized as impossible due to the competitive advantage other businesses in the same market would have over the one adopting a living wage. The economic argument would be that, ceteris paribus (all other things being equal), a company that paid its workers more than required by the market would be unable to compete with those that pay according to market rates. This criticism ignores possible benefits that come out of higher wages that include: higher efficiency and production gains due to reduced absenteeism and a reduction in recruitment, training and supervision costs.

Another issue that has emerged is that living wages may be a less effective anti-poverty tool than other measures. Authors point to living wages as being only a limited way of addressing the problems of rising economic inequality, the increase of long-term low-wage jobs, and a decline of unions and legal protection for workers. Since living wage ordinances attempt to address the issue of a living wage, defined by some of its proponents as a family wage, rather than as an individual wage, many of the beneficiaries may already be in families that make substantially more than that necessary to provide an adequate standard of living. According to a survey of labor economists by the Employment Policies Institute in 2000, only 31% viewed living wages as a very or somewhat effective anti-poverty tool, while 98% viewed policies like the US earned income tax credit and general welfare grants in a similar vein. On the other hand, according to Zagros Madjd-Sadjadi, an economist with the State of California's Division of Labor Statistics and Research, the living wage may be seen by the public as preferable to other methods because it reinforces the "work ethic" and ensures that there is something of value produced, unlike welfare, that is often believed to be a pure cash "gift" from the public coffers."

The concept of a living wage based on its definition as a family wage has been criticized by some for emphasizing the role of men as breadwinners. However, occupations that would most benefit from a living wage, including cleaning, catering, childcare, care for the elderly and the sick, and routine office jobs, are disproportionately affected by low pay and disproportionately staffed by women.

Cryogenics

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