What Is a Living Wage? How It Compares to the Minimum Wage

How Much Do You Need to Live?

Two women realizing they don't make a living wage.
The living wage will pay for enough food, clothing and shelter. Photo: Jan Mammey/Getty Images

Definition: The living wage is the amount of income needed to provide a decent standard of living. It should pay for the cost of living in any location. It should also be adjusted to compensate for inflation.

The purpose of a living wage is to make sure than anyone who works full-time should have enough money to live above the federal poverty level and avoid homelessness.

A living wage does not include some basic buffers needed to improve one's quality of life or protect against emergencies.

For example, it doesn't provide enough income to eat at restaurants, save for a rainy day or pay for education loans. It doesn't include medical, auto or renters/homeowners insurance. In other words, it's enough to keep you out of a homeless shelter, but you'd still have to live paycheck-to-paycheck. If you can't afford insurance, and you get sick, you could still wind up homeless.

Living Wage Calculator

A living wage calculator shows the hourly rate needed to pay for typical basic costs in a given location. These costs are usually food, health care, rent, transportation, child care and taxes. The cost estimates are usually taken from government and non-profit surveys of such costs.

M.I.T. provides the most well-known calculator.  The institute developed it in 2004 and updated it in June 2012. The calculator shows costs for each of the 50 states and the living wage needed to pay those basic costs.

It compares this to the minimum wage, and the poverty wage. It also shows which occupations in the area typically pay less than the living wage. See MIT Living Wage Calculator.

The Economic Policy Institute has another calculator designed for a family with children. It also used federal data for the major metropolitan areas.

Since it was lasted updated in 2008, its cost of living estimates are lower. See EPI Living Wage Calculator.

Living Wage Campaign

The goal of the living wage campaign is to make sure the minimum wage is equivalent to the true cost of living. The campaign is often waged at state and local levels, as well as at the national level. Some campaigns focus on paying a higher-than-minimum wage to those who receive local government contracts. Others try to address raising the minimum wage for all employees in the state.

The living wage campaign is a popular cause among voters because 60% of Americans have, at one time in their lives, been paid the minimum wage, and know what it feels like. Support has grown as income inequality in the U.S. has increased. Although most people are opposed to handouts (such as unemployment benefits) to those who don't work, they like to see hard workers be rewarded.(Source: New York Times, What Is a Living Wage?, January 15, 2006)

There are several living wage campaigns.

  • The Universal Living Wage Campaign -- This group seeks to tie increases in the minimum wage to the cost of housing. Its goal is that no one to pay more than 30% of income (Federally recommended percentage) for adequate housing.

Living Wage Versus Minimum Wage

The living wage is often confused with the minimum wage. In fact, the terms are often used interchangeably. That's because the intent of the minimum wage is to provide a living wage. However, the minimum wage is an amount set by law, whereas the living wage is determined by costs. The amount needed to provide a living wage depends on what is included in the calculation. The amount set by lawmakers for the minimum wage must take into account the needs of business as well as workers. They must also consider the overall impact on the economy.

Although the minimum wage was set to allow workers enough income to stay out of poverty, it often hasn't kept pace with the true cost of living. As a result, many of those who make the minimum wage are living below the federal poverty line. Others are above that, but cannot make enough to get an education to get a better-paying job. Others are living paycheck-to-paycheck.

One reason the minimum wage is lower than the living wage is that it has not kept up with the cost of living. If it had been indexed to the consumer price index over the last 40 years, the minimum wage would now be $10.41. If it had kept pace with executive level pay increases, it would be $23/hour. (Source: Raise the Minimum Wage)

Living Wage Versus Poverty Level

The federal poverty level is $23,050 for a family of four. That's equivalent to $10.60 per hour for a full-time worker. A worker making the minimum wage of $7.20 per hour would be below the poverty level. That's why both parents need to work minimum wage jobs to stay above the poverty level.

To make things simpler, a single person must earn $11,170, or $5.21 an hour to be above the poverty level. For that person, the minimum wage would be adequate.

Compare the Living Wage to the Minimum Wage and Poverty Level

Just because a single person is making the minimum wage and living above the poverty level doesn't mean they are making enough to provide for a living wage in even the cheapest city in the country, Winston-Salem, North Carolina (according to Kiplinger's). The MIT living wage calculator says that a single person must earn $8.11/hour to afford the average housing, medical, food and transportation costs.

Some cities have a higher minimum wage than the national level, just to solve this problem. For example, the second cheapest city (again, according to Kiplinger's) is Springfield, Illinois. Here, a living wage is $7.89. Since the national minimum wage wasn't enough, the city raised the minimum wage to $8.00/hour. This is enough for a single person, but falls short for a family of four, which requires $17.78 to cover the basic costs. Even if both parents work full-time, making a total of $16.00/hour, it's not enough.

Hopefully, you now see why the concept of a living wage is so tricky to implement. It varies from city to city, and region to region. Many cities and states have indexed their minimum wages to inflation, which compensates for any rises in the cost of living. If the government were to try and institute a living wage for everyone, it would require meticulous planning and regulation. It would need to vary by region, and by family size. When the government gets that detailed, you get into a command economy. This restricts the natural dynamics of the free market economy, and leads to unanticipated negative results.

For example, President Nixon instituted wage-price controls to protect workers during the inflation in the 1970s. One of the results was that businesses had to continually raise prices to offset ever-increasing wages. This made inflation worse, and led to a destructive upward spiral.

The government has some role in setting a minimum wage, if only to institute child labor protection and prevent the worst kind of abuses in pay. But it's not the government's role to protect workers at the expense of a healthy economy.