🔺New Model: Calculating Minimum Wage and Poverty Line

In the context of earning a wage for a living, the ability to increase one’s wages is a function of 1. Career Advancement, 2. Horizontal Job Moves, 3. Vertical Job Moves and/or 4. Seniority/Loyalty Promotions.

Ideally and in theory, an individual will advance as far as their Skillset will take them until they rise to their greatest incompetence. It is at this juncture that all have risen to their greatest incompetency whereby as a whole and on average the incompetencies cancel out when diversity exists. However, there are also frictions to simply advancing infinitely to your greatest incompetency such as market forces and hierarchical structures. Such frictions tend to lead to horizontal job moves and/or vertical job moves.

A horizontal job move is a function of switching jobs to a new employer for the same role. The new employer will typically offer a wage that is higher than your previous wage for your services unless in the negotiating process you say exactly what you were paid before, your position is becoming obsolete, or you were paid higher than market rates dictate and the new employer is at parity with market rates.

A vertical job move leads to a wage increase because the default assumption is the vertical job move is also career advancing at which point one would receive the prevailing rate in the market unless negotiated higher.

The other alternative is remaining employed at a single company until retirement and watching your wages increase based on a range of factors including seniority, loyalty, company growth, and market forces. Market forces inherently dictate there is a limit to one’s wage increases. Additionally, there is a limitation to joining a company until retirement considering the pace at which disruption now occurs.

While these are the viable means to increase one’s wages, there is a threshold where a dynamic minimum wage level needs to be set. If left to its own devices, the private sector will set wages at a level that maximizes its profits at the lowest level above insolvency and below the required minimum wage threshold as the burden of responsibility to pay a wage above the poverty line now rests on the government to fill in the gaps via entitlements. Yet, in setting a market rate below the required minimum wage and poverty line, the private sector is also against entitlement programs because it requires higher taxes on the private sector, individuals, or both – an inherent catch 22. Additionally, setting a rate below the required minimum wage and poverty line reduces savings given the dynamic inflation composite causing more households to become dependent on Social Security in later years, another entitlement program.

The current poverty line calculation utilizes pre-tax cash income against a threshold that is set at 3x that of a minimum food diet in 1963!

The minimum wage model needs to be set according to the average, basic, lowest cost structure for a household(s) and adjusted for that inflation composite. This threshold becomes the poverty line and adjusts dynamically. This threshold is then compared across the distribution of wages in the United States to see where gaps exist between the minimum wage and market rates as this identifies where entitlements flow to the most and where policies need to be devised. This places the burden on the private sector. In turn, the private sector will argue this will make businesses less competitive in the global market. This is not so when applied on a uniform basis. This forces the entire system to innovate and create value.

Published by Diamond1

I have an extensive background throughout the financial spectrum with high-level experience on the sell-side, high-net worth private banking, portfolio management, international finance, public pensions, VC, PE, and economics. I enjoy working and collaborating with people that I admire and trust.

"Fit Models to Problems, Not Problems to Models"

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