What Is a Living Wage? Definition, History, and How to Calculate

What Is a Living Wage?

The term 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 it should be enough to ensure that no more than 30% of this income gets spent on housing. As such, living wages are often substantially higher than the legal minimum wage.

How a Living Wage Works

What constitutes a living wage may vary slightly depending on who's defining it. According to the Global Living Wage Coalition, some 60+ definitions and descriptions of the term exist. Despite some deviations, the organization found certain common themes when comparing how it is defined in human rights declarations, by non-governmental organizations (NGOs), and from others. So what exactly is a living wage?

The general consensus is that a living wage is one that provides individuals with enough income to support themselves without falling below the federal poverty line (FPL). In essence, it gives workers and their families the means to maintain a decent standard of living so they can afford:

• Housing
• Healthcare
• Food
• Education
• Regular savings
• Other basic necessities
  

Although the idea of a living wage isn't new, it became a hot topic following the Great Recession. The economic crisis highlighted the fact that some individuals just can't afford to make ends meet. Some experts believe that people who don't earn a living wage face certain challenges, such as having to work more than one job, pulling their children out of school, and succumbing to unexpected health issues that they can't afford to address.

According to research from 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 (two working adults with two children) up from $16.14 in 2018. Of course, a living wage varies by family size and the cost of living in a particular city or location.

History of the Living Wage

As noted above, the movement for a reasonable living wage is hardly new. 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, Congress passed the Fair Labor Standards Act (FLSA) 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 (about $12.50 per hour in 2021 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 remains there as of 2022; however, in some states, such as California and New York, the minimum wage for nonexempt workers is as high as $15 per hour.

In fact, many states, cities, and municipalities have minimum wages higher than the federal minimum wage. In 2022, 26 states will be increasing their minimum wages even further above the federal minimum wage. As of Jan. 1, 2022, 22 have already done so. There is a strong labor movement in the U.S., pressing for a $15 federal minimum wage.

Living Wage vs. Minimum Wage

Don't confuse the living wage with a minimum wage. The latter is the lowest amount of money a worker can earn as mandated by law. 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.

Indeed, the federal minimum wage of $7.25 per hour, which, as noted above, has remained at that level since 2009, 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 around $12.50 per hour. Most states have their own minimum wage laws to try and align it more closely with a living wage. In some states, the minimum wage is actually below the federal minimum wage. When this occurs, 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 Joe 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.

Living Wage and Poverty Levels

Poverty in the U.S. may partly 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 low wages that do not lift families and individuals out of poverty. The bill aims to increase the federal minimum wage over five years for regular employees, along with those who receive tips and new workers under the age of 20.

The federal minimum wage of $7.25 an hour in many states is not enough to raise a family of four above the federal poverty level, which is $27,750 in 2022. That's $13,590 for an individual. As such, working and earning the federal minimum wage isn't enough to get out of poverty for families and not enough money to be classified as a living wage.

Advantages and Disadvantages of the Living Wage

Living wages are very controversial. As such, the idea surrounding them and their effects on the economy are hotly debated. We've outlined some of the arguments for and against living wages.

Advantages

Supporters of a living wage argue that paying employees higher salaries actually benefits corporations as a whole. They claim that employees who earn a living wage end up being more satisfied, which helps to reduce staff turnover.

Another advantage to living wages is that they reduce corporate costs associated with recruitment and training. Proponents of living wages point out that higher wages boost employee morale, which can often lead to higher productivity. This, in turn, allows companies to benefit from increased worker output.

Disadvantages

Despite the obvious support, there are critics who suggest leaders should scrap the idea of living wages altogether. Naysayers believe that implementing a living wage establishes a wage floor, which harms the economy by hurting companies, especially small businesses that can't afford to raise salaries.

Moreover, companies may reduce the number of employees hired if they are forced 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.

Calculating the Living Wage

As noted above, a living wage is not the same thing as a minimum wage. Earning a living wage means you can pay necessary costs, including shelter, food, healthcare, childcare, taxes, and transportation. In addition, a living wage may be different depending on your circumstances, including the state and town in which you live. In 2004, MIT created a Living Wage Calculator, which is updated in the first quarter of every year.

This online calculator provides the living wage, minimum wage, and poverty wage for 50 states plus counties and the District of Columbia. If you use the calculator, first plug in the state, then choose from a list of counties. The calculator shows you the wages for individuals, couples (one or both working), and families with up to three children.

Alternatives to a Living Wage

One 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 universal basic income from the federal government that covers basic living costs. There are various plans around universal income, from only giving money to those earning below the poverty line to paying every citizen a certain amount of money.

The U.S. does not offer this type of income yet, although some might suggest President Biden's $1.9 trillion American Rescue Plan is a step in this direction. In July 2021, families who qualified received government-issued cash benefits for each child. The program lasted only for 2021.