DEFINITION of 'Living Wage'

Living wage refers to a theoretical wage level that allows an individual to afford adequate shelter, food and the other necessities. A living wage should be substantial enough to ensure that no more than 30% of it gets spent on housing. The goal of a living wage is to allow employees to earn enough income for a satisfactory standard of living.

BREAKING DOWN 'Living Wage'

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 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.

Living Wage History

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.

Living Wage and 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 has decreased since 1968. For example, as of 2017, the federal minimum wage is $7.25 per hour with a constant dollar value of $7.80 per hour. 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.

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