The principle of the living wage and the principle of subsidiarity are the most distinctive tenets of Catholic social doctrine. The Church’s teaching on the living wage received its classic formulation in Pope Leo XIII’s great encyclical Rerum Novarum (1891). Since then, every pontiff has reaffirmed the moral necessity of a living wage.
According to Pope Leo:
Were we to consider labor merely insofar as it is personal, doubtless it would be within the workman’s right to accept any rate of wages whatsoever; for in the same way that he is free to work or not, so is he free to accept a small wage or even none at all. But our conclusion must be very different if, together with the personal element in a man’s work, we consider the fact that work is also necessary for him to live: these two aspects of his work are separable in thought, but not in reality. The preservation of life is the bounden duty of one and all, and to be wanting therein is a crime. It necessarily follows that each one has a natural right to procure what is required in order to live, and the poor can procure that in no other way than by what they can earn through their work.
Let the working man and the employer make free agreements, and in particular let them agree freely as to the wages; nevertheless, there underlies a dictate of natural justice more imperious and ancient than any bargain between man and man, namely, that wages ought not to be insufficient to support a frugal and well-behaved wage-earner. If through necessity or fear of a worse evil the workman accepts harder conditions because an employer or contractor will afford him no better, he is made the victim of force and injustice….
If a workman’s wages be sufficient to enable him comfortably to support himself, his wife, and his children, he will find it easy, if he be a sensible man, to practice thrift, and he will not fail, by cutting down expenses, to put by some little savings and thus secure a modest source of income.
It is morally wrong for an employer to offer, or a worker to accept, a wage that is below the subsistence level. Because we work in order to live (and to enable our dependents to live), it is an offense against life itself to be required or willing to work for a wage insufficient to sustain life.
But defining a just wage, like defining any other just price, is not easy. It depends on at least three factors: the value of the work to the employer; the prevailing cost of living; and the family responsibilities of the worker.
In most cases, the market is a reasonably good mechanism for achieving just wages. The first two factors tend to balance one another and to keep wage rates within a range that is high enough to sustain the lives of workers and low enough to maintain the profitability of economic activity. But the third factor, the worker’s family obligations, eludes the market mechanism because it may require heads of families to be paid more than single workers for the same work.
In developed economies, wage rates tend to be high enough so that market forces alone result in a just wage for most workers with families. But in economies that are in transition from an agrarian to an industrial base—such as the United States from the Civil War to the Great Depression, or the Pacific Rim countries today—wage rates tend to be low, close to the subsistence level, and below that needed to support a family in decent comfort. This is because high profits are needed for reinvestment and continued economic expansion. As a consequence, women and children are forced into the labor market and the living standards of workers are inadequate.
This was the specific problem which Pope Leo addressed in Rerum Novarum and to which the progressive economic reforms of the early twentieth century were directed.
Among these reforms, and one which was enthusiastically promoted by the U.S. Catholic bishops in their 1919 plan for social reconstruction, was the enactment of minimum wage laws. A national minimum wage of 25 cents an hour became a reality with the New Deal. With rises in inflation and living conditions, the minimum wage was increased repeatedly by Congress, most recently last year, when it was raised from $3.35 to $4.25 per hour.
The U.S. Catholic Conference supported that increase in the name of the Catholic teaching on the “living wage.” In its 1986 pastoral letter on the U.S. economy, the Conference had called for such an increase, and in his letter to President Bush, Archbishop John May, president of the Conference, cited that recommendation. He went on to argue that “In the teaching of the Catholic Church, the principle of a just wage is integral to our understanding of human work. We believe that wages must be adequate for workers to support themselves and their families in dignity.”
Archbishop May’s statement of the Catholic social principle was perfectly correct, but it had little, if any, relevance to the minimum wage debate. Increasing the minimum wage does not sustain the principle of a family wage. In fact, it tends to have the opposite effect.
Subsistence Living
Few would argue that the annual income generated by a full-time, year-round job at the old minimum wage—less than $7,000—is adequate to support a family in “reasonable comfort” in contemporary America. But neither is $9,000, the annual income of the same job at the new minimum wage. Workers at the minimum wage, however, are not supporting families. Fewer than one in ten of them have any dependents at all.
Nearly half the workers earning the minimum wage work only part-time and contribute a supplementary income to their families. Most full-time workers at the minimum wage are young people in entry-level positions who support only themselves or add a second or third income to their households. Many are married women who feel compelled to take a job because the wages of their husbands, while well above the minimum, are not sufficient to support their families as they would like.
All workers are entitled to a fair wage, and one function of a minimum wage law is to declare that compensation which falls below a certain level is inherently exploitative. But if we ask the question, “How much pay is necessary to protect a worker with no family responsibilities from being exploited?” then compensation at the annual rate of $6,968 ($3.35 an hour) is not necessarily a violation of justice. To put it another way, it is not necessarily an assault on the human dignity of a high school student to pay him less than $4.25 an hour for washing cars.
Consider the fact that the government-designated poverty level for a single individual is $5,909, or more than $1,000 under the pay for a full-time job at the old minimum wage: no self-supporting single person working year-round at a full-time job could possibly have been poor, according to the official government definition.
Consider also that this same worker had to pay income taxes, despite his low level of earnings. With a personal exemption of $2,000 and a standard deduction of $3,000, a single worker at a minimum wage ($3.35/hour) job had taxable earnings of $1,968, and owed $295 in federal income tax. He also had to pay $533 for social security, with his employer contributing a like sum. These federal exactions reduced his take-home pay to $6,140. By the time he paid state and local taxes, his after-tax earnings might well have been below the official poverty level. But he was not paid an unjust wage; he was taxed into poverty.
Suppose that worker got married. His earnings of $6,968 were below the poverty line for a married couple, even though his income tax liability (but not his social security tax) disappeared. Thus it was argued that the $3.35 minimum wage did not enable young men to marry and establish a family. But most newly married couples both work, at least until the first child is born, and very few young men who work hard remain at the minimum wage level. Once a worker gains a few months’ experience and certain skills, it is economically feasible (and morally necessary) for his employer to increase his wage rate.
Another category of minimum wage earners consists of single mothers, supporting one or more children. The poverty level for a mother-child household is $7,641—greater than her earnings from a full-time minimum wage job. But the earned income tax credit (EITC) goes a long way toward closing the gap between what she earns and what she needs. Under this device, an amount roughly equivalent to the combined payments of the employee and the employer into social security are returned to the low-income worker with a dependent child. For the minimum wage worker, this credit came to $975, bringing net income, after federal taxes, to $7,410. The EITC almost eliminated the gap between a minimum wage job and the poverty level for a single parent with one child.
What all this shows is that for workers who are themselves dependents of other wage-earners, for those who are single with no dependents, and for those who have one dependent—in other words, for virtually all minimum-wage workers—the old minimum wage was not necessarily inadequate.
Heads of Households
The only compelling argument for an increase in the minimum wage was in the case of workers who are heads of households with families to support. For them, the minimum wage was simply not adequate, not a living wage, and hence unjust. The increase to $4.25 raises a couple with one child above the poverty line. But workers supporting larger families on a minimum wage still do not earn a living wage.
If it is morally necessary for the minimum wage to enable a father with one child to support his family, then why is it not morally necessary to ensure that every job provides a living wage for a father of two or four or ten children?
In fact, if the objective is to ensure that all workers receive a living wage, the solution cannot be found in minimum wage laws. A minimum wage is, by definition, a poverty wage. It is the lowest rate of pay that exists in the economy, and no matter how high it is set, those who receive the minimum wage are at the bottom of the economic pile… except for the unemployed.
Yet a higher minimum wage creates more unemployment by eliminating marginal jobs. In addition, it fuels inflation by increasing the cost of production.
No one denies these negative side effects of an increased minimum wage. Proponents as well as opponents of the increase acknowledged that these results would occur. The only disagreement was over their magnitude. Estimates of the number of jobs lost by the increase ranged from 150,000 to 500,000. Yet the end result of this process is to keep the lowest-paid workers, relatively speaking, right where they were before. Raising the minimum wage inflicts the suffering of unemployment on several hundred thousand of the poor, with absolutely no long-term benefit for anyone.
This is not to deny the good intentions of those who supported an increase, nor to deny the fact that the old minimum wage was inadequate to assure a living wage for a head of household with dependents. The problem is simply that a minimum wage law is the wrong instrument to achieve the objectives sought.
The determination of a living wage depends on the cost of living and the family responsibilities of the worker. Minimum wage laws address only the first of these factors. The cost of living is an external condition that applies equally to all persons in a given locality. It is a reasonable principle that no full-time job should pay less than the wage necessary to enable a single person to live at a standard above the prevailing poverty level. The old minimum wage provided that level of compensation for virtually everyone in a minimum-wage job.
But minimum wage laws are completely insensitive to the other factor, that of the family responsibilities of the worker. The new minimum wage will, in fact, tend to push more families away from the standard of a living wage because of its inflationary effect, to say nothing of its impact on marginal employment.
Yet the problem remains that many workers—especially those with dependent children—do not earn a living wage. For men under 35, and for men of all ages with only a high school education, wage levels in real dollar terms actually declined by 14 percent from 1973 to 1987, while their effective tax burden has increased. Many of these are the fathers of young families. And even though they typically still bring home enough to stay above the official poverty line, their standard of living has declined considerably and continues to decline. One direct consequence of this is that more of their wives have felt compelled to enter the labor market—a factor which, in itself, contributes to holding down the real wage levels by increasing the supply, and therefore reducing the price, of labor.
A father who earns $18,000 a year (and has to pay $2,000 of it back in federal income and social security taxes) may be above the designated poverty line, but he is not able to set aside savings, purchase a house, pay for the education of his children, or contribute more than a pittance to charity. If his wife takes a job earning an additional $15,000, the family can enjoy a measure of financial security, but only at the cost of robbing their children of parental presence at home and forcing the mother to set aside her primary vocation.
That $18,000 salary may be perfectly adequate for a single worker, or even one who is newly married with no children yet. But apart from some miserly tax exemptions (amounting to an annual net tax break of only $300 per child), there is no mechanism either in the economy or in law to adjust the wage rates to increases in the family responsibilities of workers.
One approach would be higher pay rates for workers with dependents. In jobs exempt from ordinary market forces, this is not only possible but already in force in at least one instance: military personnel receive additional allowances for dependent spouses and children. Conceivably, this same system could be applied to civilian government workers, at least in some job categories. But any attempt to apply this remedy to the private sector would produce exactly the opposite effect of the one intended.
If private employers had to pay their workers more for each dependent, they would seek out employees with the smallest number of dependents. It is in their interest to pay $18,000 instead of $24,000 for the same job. The result would be massive unemployment among the fathers of large families, who would become the last hired and the first fired. “Equal pay for equal work” is not only the current legal standard, but it is also the natural tendency of a market economy.
Such a reduction of workers to faceless units of production stands in flat contradiction to the social doctrine of the Church. Since the market has no practical way to ensure higher wages for workers who bear greater family responsibility, some other mechanism must be found to adjust wages to family size. The most convenient and most flexible instrument is the tax code.
Tax Relief
Tax policy already—and inevitably—is social policy. Any condition of activity which receives tax benefits (e.g., the purchase of a home) is thereby encouraged and stimulated, while any condition or activity which is denied tax benefits (e.g., tuition for the education of children) is thereby discouraged and stifled. As things stand, our current tax laws discourage having children.
Therefore, tax reform offers the best opportunity for realizing the principle of a living wage. The following reforms provide a core for policy initiatives in this direction.
•Increase the tax exemptions for dependents. The 1948 personal exemption of $600 represented one-fifth of the average workers’ earnings. The current $2,000 exemption represents only about one-fifteenth of the average worker’s earnings. At a marginal tax rate of 15 percent, the exemption for each dependent child is worth only $300—barely enough to support a child for one month, let alone a year. The personal exemption for dependents should be raised to the equivalent of its 1948 value: $6,000. The exemption for working persons can remain at its present $2,000 level because workers are producers of income, not dependent on the earnings of others. This will increase the after-tax earnings of most workers with dependents by $600 per dependent. It will give them a relative advantage over workers without dependents, without affecting their ability to compete in the labor market.
This reform will be of the greatest benefit to middle-income families who earn enough to have tax liability. The tax burden on a married man with three children who earns $30,000 will shrink from $2,250 to zero, while his single co-worker will continue to pay about $4,000 in income taxes. Most families with children will have to pay no federal income tax under this reform. Their service to the Republic consists in giving sound family training to their children, who represent the nation’s future.
•Increase the standard deduction for married couples from $5,000 to $8,000. This makes that deduction slightly higher than that of a cohabiting couple, creating a tax benefit for marriage.
•Index the earned income tax credit on the basis of family size. The EITC is the only refundable tax credit now available to individual taxpayers. It is limited to low-income workers with dependent children. The EITC provides a credit equal to 14 percent of the first $7,000 earned. For earnings above $9,000, the credit phases out at the rate of 11 percent per additional $1,000. It offers an incentive for workers to free themselves from welfare dependency, and enables at least some heads of households with low-paying jobs to stay above the poverty level.
Its weakness is that it does not provide an adequate income supplement for workers with more than one child. Since the EITC is, in large part, an alternative to Aid to Families with Dependent Children, which is indexed to the number of dependent children, the credit should be provided on a per-child basis.
•Reduce social security taxes for workers with dependent children. The continued existence of social security is threatened by the alarmingly low birth rates which the United States has experienced over the past generation. Workers with children are contributing to the retirement security of those without, and it is appropriate to provide a tax break for them.
If the social security tax rate, on both the employee’s and the employer’s share, is reduced by 1 percent per dependent child, this would not only increase the disposable income of families with children, but also create a slight but important competitive advantage in the labor market for heads of families. For a $25,000-a-year job, an employer could save $1,000 a year by hiring a candidate with four children instead of one with no children. Heads of families will tend to suffer less unemployment and achieve faster promotions.
This reform can be paid for by eliminating the cap on income taxable under social security. It is a rank injustice that a laborer earning $10,000 a year contributes proportionately five times as much into the retirement fund as an executive earning $250,000. There is little justification for exempting high incomes from this taxation, but immense justification for instituting tax reductions for those workers supporting children.
•Institute universal, refundable child care credits. For every child under school age, the parents should receive a tax credit linked to family income. This credit should accrue at the rate of 12 percent of earnings up to $8,333, yielding $1,000 per child for the working poor. At incomes over $10,000, the size of the credit can be reduced at the rate of 1.5 percent per additional $1,000 of income up to $40,000. At that point, the credit will be worth $550. For higher incomes the phase-out rate can be accelerated to 5 percent per additional $1,000 of income up to $51,000, at which point the tax credit would reach zero.
This benefit can be paid for, in part, by abolishing the current dependent care credit. That credit has the anti-social effect of rewarding families who pay to have their children cared for by someone else while mother is at work, while it provides nothing for families who care for their own children.
•Institute universal, refundable tuition tax credits of $500 for elementary school children and $1,000 for secondary school children. This is really a federal voucher under another name. It should replace all forms of federal aid to elementary and secondary education, and be available to all families with children in any public or private school which satisfies state compulsory education laws. Public schools could charge tuition. If tuition is less than the value of the credit, parents could use the credit for any purpose of their choice.
All of these recommendations converge in a single point: they amount to major shifts of economic power to families with children. This is where economic power is most needed. There is no question that this program entails the redistribution of enormous sums of money. Some of this redistribution can be covered by savings (e.g., on the dependent care credit and federal aid to public schools) and the remainder by increased taxes on those who have a greater ability to pay and fewer family responsibilities.
In contrast to an anachronistic increase in the minimum wage, these reforms will really increase the income of poor families, not simply create the illusion of doing so.
Helping the Garcias
We can see this by taking a particular hypothetical case: Roberto Garcia is 28 years old, married, and the father of three preschool children. For the past six years he has worked as a punch press operator in an electronics assembly plant. His starting salary was $5.50 per hour and he is now earning $7.50, or $15,600 a year. His five-year-old daughter will be entering first grade in the parish school next year, where the tuition is $600.
After federal taxes, Roberto’s take-home pay comes to $14,317. The poverty level for a family of five in 1987 was $13,737. Yet, the minimum wage increase offers his family no benefits, and the penalty of more rapid inflation.
With our reform package, the net earnings of the Garcias go up by more than one-fourth. The higher personal exemptions and standard deduction eliminate the small income tax liability they currently have. The social security tax reduction saves Roberto $468 and also saves his boss $468 (some of which might be turned into higher wages for Roberto). The child-care credit is worth $916 for each of the two preschool children. The tuition credit is worth $500 for their first-grader. And the earned income tax credit is worth $378 for each of their three children. The net gain for the Garcias comes to $4,024. If they have another baby next year, their tax benefits will grow by another $1450.
The Garcias and the millions of families like them will only be hurt by an increase in the minimum wage. Putting more money into the pockets of teenagers working in fast-food joints will just make it harder for the Garcias to afford hamburgers. Establishing authentically pro-family social and economic policies will enable them to thrive as a family, in dignity.
Our bishops are interested in economic reforms to bring about social justice. Their intentions are admirable. Now they need to apply Church teachings to the conditions of 1990 instead of 1919.