Living Wage and How It Compares to the Minimum Wage

How Much Do You Need to Live in America?

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The living wage is the amount of income determined 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 that all full-time workers have enough money to live above the federal poverty level.

The minimum wage is the wage mandated by law, to keep employees above the poverty level in their area. However, the minimum wage is simply not enough to provide one with the means to live. It also is not enough to cover medical, auto, or renters and homeowner's insurance.

Living Wage vs. Minimum Wage

The living wage is often confused with the national minimum wage. In fact, the terms are often used interchangeably. The U.S. Congress originally created the minimum wage with the intent to provide a living wage.

The minimum wage is an amount set by law, whereas the living wage is determined by average costs to live. 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 businesses as well as workers. They must also consider the overall impact on the economy.

The minimum wage was originally set to allow workers enough income to stay out of poverty. The minimum wage concept has failed because it hasn't kept pace with the rising cost of living, causing many working people to live below the poverty level.

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. For these reasons, many people want the minimum wage raised.

Average health insurance premiums in 2019 were $7,188 for single coverage and $20,576 for family coverage. The minimum wage has been $7.20 for quite some time—if a husband and father of two worked for 40 hours a week at minimum wage, he would make $14,976 annually before withholding.

Living Wage vs. Poverty Level

If a living wage of $11.50 were provided, the same father would make $23,943 before withholding; however, his family would still be below the established poverty levels ($25,750 for a family of four).

This same impoverished family would also not be able to afford an average health insurance policy.

In 2019, the Department of Health and Human Services set the federal poverty level at $25,750 for a family of four. That's equivalent to $12.38 per hour for a full-time worker. A worker making the minimum wage of $7.20 per hour would be below the poverty level. Both parents would need to work minimum wage jobs to stay above the poverty level.

On the other hand, a single person must earn $12,490 a year, or $6.00 an hour, to be above the poverty level. A single person making $14,976 a year ($11.50 an hour), they would barely be making enough to live on in many states.

Least and Most Expensive Cities

Even those making the minimum wage and living above the poverty level aren't making a living wage. For example, the cheapest city in the country is Harlington, Texas. The MIT living wage calculator says that a single person must earn $10.47 an hour to afford to live there.

That covers the average housing, medical, food, and transportation costs. If the national minimum wage isn't a living wage in even the cheapest city in the country, it's not a living wage anywhere.

On the other hand, the most expensive U.S. city is Manhattan, New York. MIT's calculator estimates the living wage to be $17.46 an hour for a single adult. The calculator assumes housing costs of $18,168 a year. It would be difficult to find an apartment in Manhattan for $1,500 a month. Even at a living wage, you'd need roommates.

The Complications of Mandating Wages

Mandating a national living wage would be complicated to implement. The cost of living varies between cities and regions. Many cities and states have indexed their minimum wages to inflation, which compensates for any rises in the cost of living.

A government would have to order certain areas to pay certain wages. When the government gets that detailed, the system becomes a command economy, where all economic decisions are made by a central government. This restricts the natural dynamics of the free market economy and leads a country in the opposite direction of freedom.

There would be a similar problem in instituting a universal basic income. It is a government guarantee that everyone receives a minimum income. The concept has gained popularity as a way to offset job losses caused by technological advancements.

The government has a legitimate role in setting a minimum wage. Congress should increase the minimum wage annually to ensure it keeps up with inflation. While tackling the increase of the minimum wage, legislators should be taking a hard look at the amount of money required to live, not simply exist.

Living Wage Calculators

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

The Massachusetts Institute of Technology provides the well-known Living Wage Calculator. The Institute developed it in 2004 and updates it in the first quarter of each year. The calculator shows the minimum wage, poverty wage, and living wage for each of the 50 states, and the counties in them. It also shows in numerical order, from high to low, of the pay for certain occupations. 

The general concept behind these calculators was to give employees and businesses a frame of reference for wages in the area they live and operate in.