I think it was a mistake for you to give examples of other firms and what your friends make. The fact that you know for yourself that you are underpaid is good enough. 

Now that you have told your boss how much your peers make, if you are lucky, that is the maximum you will be paid.... As a business owner, your boss obviously wants to pay you the least he could to keep you happy so if you are satisfied with a number you put out as an example then that is what he will give you. This number however, may not coincide what your employer should compensate you... 

Although you only have 2 years of experience, perhaps the type of work you do is that of an intermediate/project architect (who knows?). If you hadn't told him about what your peers make, then depending on the type of work you do, you could have referred to industry standards to argue what the type of work you do is actually valued at. In other words: if you are hired as an intern and are paid 35k and you told your boss your friends who are juniors make 42k, but the work you are doing as an intern is really that of a project architect, you could have made the case for making between 55-65k. I don't know the specifics, but this is just to serve as an example for why you shouldn't put all your shit out there, especially to your boss. 

On another note, now that you have actually done yourself this disservice, how do you get yourself out?

Advice: Tell your boss that you really like the firm and that you feel that you have grown a lot over the past two years at the company. Tell him that unlike some of your friends, you have exhibited loyalty and plan on continuing to do so, but you would also like to have a conversation about how this growth can somehow be manifested in your compensation. Ask for some advice on areas you can improve on.

Don't bring it back up yet, particularly if he's interviewing.  If he is underpaying, those folks he is interviewing will reject his offer if it's really low.  (assuming the market you are in is a hiring market).  Anyway, it was usually that sort of thing that had me looking a bit more at what I was paying my employee's that I valued and didn't want shopping for work elsewhere.  Basically, also as a result of hiring, you look at your fee structure, where the firm is financially, etc. So at least for me, my head was in a place where that initial shock went fast and I could think about it rationally from a business standpoint.  You think a lot about fair, competitive salaries when you are hiring. 

Start looking elsewhere, but be smart about it. You already laid out all your cards and need something else if you want to bring up the issue again. Don't tell your employer, and don't tell friends who can't keep a secret. Do let those firms you contact know that you would appreciate their discretion in contacting your current employer. 

If you get an offer you can go to your current employer and use it to bring up the topic again and see if anything has happened. More often than not, if they value you as an employee, they will make you a counter offer of some sort. 

Unfortunately, you've already shown your hand, but it wouldn't hurt to have some actual reasons you want more money than just your friends make more. Why do you need more money? New car? New apartment? New house? New family? Would other benefits be options you would consider instead of a raise? I'm assuming you want to stay, otherwise you would have just found another job. Your chances of getting a pay increase are much better at switching jobs than it is to stay put. 

I was in a very similar situation as you six months ago. Requesting an 8-10k raise, even if it just brings you up to market, requires you to communicate to your employer that it is important to your long-term professional growth at the company. If they can't bring you up to market now, then you will continue to be underpaid as you receive increases from getting licensed, begin managing, etc.

It sounds like they are either a) really cheap or b) do not think you are worth market rate, for whatever reason. When I did what you did, I was about 10k under market. I asked for 15k, and was given 10k. You should have been given some indication that they were receptive to your request. If they didn't, they aren't going to pay it. I believe your best option for a significant pay increase is to move to another firm. 

Side note, I think it's so unprofessional of your employer to ask you "what your friends are making". He runs a business and I would bet he knows exactly what firms around town are paying. 

As a business owner I think Bulgar has it right, follow his last paragraph and just ask....no need to rake over all the details you did that already, if he doesn’t bite better start looking. Wouldn’t wait for the new guys for reasons stated.

Don’t think it was a mistake to carry facts into the meeting, owners are more focused on what other firms are charging (fees) than what they are paying…he probably and honestly didn’t know.

Once somebody hires you at a specific rate it is very difficult/next to impossible for them to see your worth ever going above that.    

In the first 5-10 years of practice, you learn a shit-ton and your value increases exponentially as you are in your formative years, but employers rarely see that. They just see you as overhead that they are trying to minimize.  

The only way to get what you are worth is to jump ship/make a lateral move to a different company that sees your increasing skill set as an asset.  Unfortunate to the powers that be because they have tunnel vision and loose some really good people by not seeing potential and compensating for that before they go where the grass is greener.  

I think mightyaa and Everyday Intern have the right of it. Shop around a little bit, quietly, but keep in mind that the hiring process may open your boss's eyes. My office recently went through a similar issue—basically salaries were still stuck in recession mode, and they weren't able to hire people at rates comparable to what they were paying existing employees. I came out of it with a decent raise because they saw too many people leaving and couldn't replace them. 

That said, I'm guessing $8–10k is about 20% of your salary based on your age. It's going to be very, very difficult to get any employer to swallow a 20% jump, no matter how right you are and how much they value you. If that specific number is important to you, be prepared to jump ship. 

Jumped ship 6 times in about 8 years 40 years ago so things haven’t changed...when you come in as a cub and grow into a bear employers just don't see it. The way to fix that is for employees to learn the business and monitor/measure ones impact on that business for annual reviews…just saying “they’re paying $47k across the street” is OK but I think there is more to gain with the former approach.

OP - I think you did the right thing by finding out some going actual rates and then presenting those to your employer. I don't really agree with above comments on "showing your hand". To the extent such a thing as a market rate exists (and is directly applicable to your own) what better way to illustrate it than through a current cross section of peers with comparable experience and geography to your own? This, if at all, is the only price point that employers are usually aware of in my own experience. Otherwise they tend to base their salary intel on whatever is going inside the company which may be totally out of sync with current market rates for reasons of being stuck in recession mode, cheapness or what have you. Most sensible bosses will make a business (as opposed to emotional) decision once confronted with other offers you might have. If they value you they will counter to the best of their ability. Only rarely have I seen people that react to this categorically by telling you to go to the other place as if you were disloyal somehow (they do exist though, sadly).

Thanks for posting this Joe. I think I'm going through the same thing you are, but I haven't asked my boss for a raise yet. I mistakenly presumed that I would have a review after a year but neither that or any mention of a raise has come up.
To make things worse, I spent some time asking some of my friends what they were making, and I was the lowest paid out of them all. I think in your case, you shoul keep looking for a new place that will pay you a salery closer to what you feel is fair. Iv been working as an entry level designer, still completing IDP hours, making 18 per hour. My friends all report making anywhere between 20 - 27. And I helped one of them land the 27 per hour job. You probably hve much more debt to deal with, with an Masters.
How would Joe and I negotiate a better rate with a new potential employer?
Thanks again Joe, sorry if I ranted about my experience, but it's been an insightful post so far. Im quietly looking for a new job for now, I would suggest the same for you.

All the best of luck to you,
Mike

My boss and I spoke again about getting up to market rate... Raises will not be discussed until later this year. And just because others in the area are getting paid more, doesn't mean our firm will pay me more... Needless to say, I will be discreetly testing the market and have already contacted friends at other firms to see if they are hiring. Thank you again for all the comments... I have one more thing that I would like to get some comments on.

I have my resume completed. As far as showing work samples, what do I show and how do I show them?

Guys, a raise is seldom “earned”.  A raise is an investment employers make on your future potential.  There is NO reason for an employer to pay you more for your contribution in the past. However heroic and instrumental your contribution may have been, it’s work your boss has received and paid for.  The only logical business reason to pay you more is if your future potential is worth the increase.

Remember this when you approach salary increase negotiations.  The following might help:

1. Don’t discount what you learned, rather, use how fast you’ve grown as proof of your future contribution potential.  You can produce a lot more value for your employer moving forward. 
2. Minimize the perception of risk.  Nobody in their right mind will invest in what they perceive as risky asset.  If you want the raise, it’s better to make your employer feel you are solid and loyal employee.  The concept of “you have to move out to move up” works to a point. But you really don’t want to have to change firm every time you want a raise (typically “careerists” target a 10-15% pay increase ever 9-18 months).  Every time you switch firm, you lose momentum, have to rebuild trust and support system, re-learn where the landmines are, etc. etc. 
3. The “market rate” argument is a little weak here because your boss has gotten your services at a “discount” rate for 2 years.  You really should make it a habit to have salary conversations at least every year.  And if the outcome is not to your satisfaction, politely make it clear that it’s not to your satisfaction and agree upon a path towards what will make you both happy.    If you leave it to your boss, it won’t happen, you’ll quit, and it’s a lose-lose situation.  This is YOUR career and YOUR pay.  You need to be the one establishing the time frame.  It’s perfectly alright to say: “I believe I’m contributing to the firm at a higher level that warrants more pay, what is the reason for you not giving me a raise?”  Once your boss tells you his list of reasons and concerns, propose a plan to address and verify the completion of each in the next X months, and schedule a meeting to revisit this issue.  At the end of your conversation, send your boss an email thanking him/her for the conversation and summarize the content of your agreed upon process in writing.
4. Some employers need reminding that newbies require significant additional investment (time for interview, on boarding, getting used to how things work).  It’s often much more cost effective to give current employee a raise.