What Is a Living Wage?

A living wage refers to a theoretical income level that allows an individual or family to afford adequate shelter, food, and other basic necessities. The goal of a living wage is to allow employees to earn enough income for a satisfactory standard of living and to prevent them from falling into poverty.

Economists suggest that a living wage should be substantial enough to ensure that no more than 30% of it gets spent on housing, and this amount will often be substantially higher than the legal minimum wage.

Key Takeaways

  • A living wage is a socially-acceptable level of income that provides adequate coverage for basic necessities such as adequate food, shelter, child services, and healthcare.
  • The living wage standard allows for no more than 30% be spent on rent or a mortgage, and is sufficiently greater than the poverty level.
  • The living wage is often suggested to be quite a bit higher than the legally-mandated minimum wage.

How a Living Wage Works

The idea of a living wage and its effects on the economy is hotly debated. Critics argue that implementing a living wage establishes a wage floor, which harms the economy. They believe that companies reduce the number of employees hired if they have to pay increased wages. This creates higher unemployment, resulting in a deadweight loss, as people who would work for less than a living wage no longer get offered employment.

Supporters of a living wage, on the other hand, argue that paying employees higher salaries benefits the company. They believe that employees who earn a living wage are more satisfied, which helps to reduce staff turnover. This reduces expensive recruitment and training costs for the firm. They also point out that higher wages boost morale. Employees with high morale are expected to be more productive, allowing the company to benefit from increased worker output.

The movement for workers to earn a reasonable living wage is not a new one. Boston ship carpenters came together in 1675 to demand higher pay. The American Federation of Labor (AFL), founded in 1886, proposed a general living wage that adequately supported a family and maintained a standard of living higher than the 19th-century European urban working class.

According to researchers at MIT, the living wage in the United States was $16.54 per hour, or $68,808 per year in 2019, before taxes for a family of four (i.e., two working adults, two children), up from $16.14 in 2018. Of course, the living wage will vary by family size and the cost of living in a particular city or location.

Living Wage vs. the Minimum Wage

Many commentators argue that the federal minimum wage should be increased to align with a living wage. They point out that the minimum wage does not provide enough income to survive as it doesn't rise with inflation; the minimum wage can only increase with congressional action.

Although the minimum wage dollar amount has risen since its introduction by President Franklin Delano Roosevelt in 1938, the constant dollar amount, which accounts for the effects of inflation, has actually decreased for American households since 1968.

$15/hr

The $15 per hour minimum wage movement is aimed at establishing a living wage.

For example, as of 2021, the federal minimum wage remains at $7.25 per hour and has remained at that level since 2009. Indeed, this hourly rate hasn't kept up with the cost of living since the late 1960s In 1968, the federal minimum wage was $1.60 per hour but had a constant dollar value of $10.75 per hour. Most states have their own minimum wage laws to try and align it more closely with a living wage; however, in some states, the minimum wage is below the federal minimum wage, in which case the federal minimum applies.

In 2019, the U.S. House of Representatives passed an amended version of the Raise the Wage Act of 2019, which would have gradually increased the federal minimum wage to $15 by 2025. But the bill died in the Senate and, as a result, the debate about whether to lift the minimum wage rages on. Under the Biden administration, the Act may get a second look. Nonetheless, several states and cities have raised the local minimum wage to $15 or more, and several companies have done so voluntarily at their workplaces as well.