What Is a Living Wage?

A living wage refers to a theoretical income level that allows individuals or families to afford adequate shelter, food, and other necessities. The goal of a living wage is to allow employees to earn enough income for a satisfactory standard of living and 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% to be spent on rent or a mortgage and is sufficiently higher than the poverty level.
  • The living wage is often suggested to be quite a bit higher than the legally mandated minimum wage.
  • Many individuals earning the federal minimum wage live below the poverty line.
  • The federal minimum wage is stagnant. The amount of $7.25 has not gone up since 2009. There are state minimum wages, and some are higher than the federal amount.

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 will 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. In addition, they believe that a living wage reduces expensive recruitment and training costs for the firm. And they point out that higher wages boost employees' morale, which may mean they are more productive, allowing the company to benefit from increased worker output.

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, a living wage will vary by family size and the cost of living in a particular city or location.

History of the Living Wage

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.

In 1938, Fair Labor Standards Act passed in Congress and established the first national minimum wage at $0.25/hour. The passage of the law marked a turning point for the labor movement in the United States. In 1968, the federal minimum wage was set at $1.60 an hour ($11.53 in 2019 dollars), but unfortunately, it begins a slow decline after the late '60s due to inflation.

In 2009, the federal minimum wage rose to $7.25 and remained there as of 2021. However, in some states, such as California and New York, the minimum wage for non-exempt workers is $15.00. There is a strong labor movement in the U.S., pressing for a $15 federal minimum wage. 

Living Wage vs. 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 decreased for American households since 1968 .

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.

$15/hr

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

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. The bill died in the Senate, but the debate about whether to lift the minimum wage rages on. Under President Joseph Biden's 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.

Poverty Levels and Living Wage

Poverty in the U.S., in part, may have to do with the lack of a living wage in all states. The Raise the Wage Act of 2021, an updated version from 2019, could help reduce or eliminate wages that do not lift families and individuals out of poverty. In many states, the federal minimum wage of $7.25 an hour is not enough to raise a family of four out of the federal poverty level, which is $26,500 in 2021. An individual must earn more than $12,800.

In many states, working and earning the federal minimum wage isn't enough to get out of poverty and not enough money to be classified as a living wage.

Calculating the Living Wage

As mentioned above, a living wage is not the same thing as a minimum wage. Earning a living wage means you can pay necessary costs like shelter, food, healthcare, childcare, taxes, and transportation. In addition, a living wage may be different depending on your circumstances, including the state and town you live in. In 2024, the Massachusetts Institute of Technology created a Living Wage Calculator, and it updates annually in the first quarter.

This online calculator includes poverty wage, minimum wage, and the poverty wage for 50 states, plus counties. If you are using the calculator, first plug in the state and choose from a list of counties. The calculator will show you the wages above for individuals, couples (one or both working), and families.

Alternatives to a Living Wage

An alternative to a living wage could be a liveable federal minimum wage that allows individuals and families to earn enough to pay for basic necessities and medical care.

Another alternative is a form of universal basic income from the federal government that would cover basic costs of living. There are various plans around universal income, from only giving money to those earning below the poverty line and others paying every citizen an amount of money.

The U.S. does not offer this type of income, yet, although some might suggest President Biden's $1.9 trillion COVID-19 relief bill is a step in this direction. In July 2021, families who qualify will receive government-issued cash benefits for each child. This program will last through the end of 2021, with an estimated 65 million children slated to receive benefits.