What is a Living Wage and Why Does it Matter?
Has the term “living wage” come up when discussing employee wages within your organization? What exactly is a living wage, and how can it affect your business?
What is a Living Wage?
A “living wage” is the wage an individual must earn to afford an adequate standard of living, based on the individual’s location, household size, and number of working adults. Those earning a living wage should be able to afford sufficient food, shelter, and other essential needs for their families.
The living wage varies by state, city, and county and is based on the Living Wage Calculator, developed in 2004 by Amy Glasmeier, a professor of economic geography and regional planning at the Massachusetts Institute of Technology (MIT).
Living Wage vs. Minimum Wage
People often confuse living wage with minimum wage, but they are not the same.
Congress created the federal minimum wage to prevent American workers from falling into poverty. The minimum wage is roughly based on poverty guidelines, but unfortunately, it has not kept up with rising living costs and is often well below local living wages. The current federal minimum wage for covered nonexempt employees is $7.25 per hour. The minimum wage is legally mandated and must take into account business needs and overall economic impact.
(This does not apply to self-employed individuals, who can actually work for as low as $1.00 per hour.)
The living wage, by contrast, is generally not legally mandated and focuses on average living costs for individuals and families.
(If your organization works under municipal contracts, receives public economic development funds, or is located in areas that have benefited significantly from public investment, you may be legally mandated to pay a living wage. Learn more here.)
How is the Living Wage Calculated?
As mentioned earlier, the living wage is based on MIT’s Living Wage Calculator, which factors in the following local costs: food, childcare, health insurance, healthcare, housing, and transportation. This calculation is based on what a single individual must earn, and it assumes that person is working full-time.
The calculator shows the living wage for counties in all 50 states. MIT updates the calculator during the first quarter each year.
Why Does Living Wage Matter?
There are many reasons why a business would want to be aware of the living wage in the location where it employs people.
According to a study by The Peterson Institute for International Economics, paying employees a living wage or higher generally:
- Increases employee productivity
- Attracts more qualified hires
- Reduces need to micromanage employees
- Reduces employee turnover
- Improves employee health
In their article “Why ‘Good Jobs’ Are Good for Retailers,” the Harvard Business Review contrasts “vicious” and “virtuous” labor cycles.
Businesses that follow the virtuous cycle pay employees higher wages and experience lower turnover, fewer mistakes or accidents, and attract more productive workers.
Businesses that fall into the vicious cycle pay low wages and experience high turnover, frequent mistakes and accidents, and disengaged, unproductive workers.
Supporters of paying a living wage claim it grows the economy by enabling workers to buy more goods and services.
However, adjusting your organization’s wages to more closely match the living wage has potential drawbacks. Some opponents of the concept of a living wage argue that the calculator cannot effectively account for the many choices each family makes, such as gardening or family childcare.
Other opponents point out that the greatest burden of paying a living wage falls on small businesses and individual employers, who have fewer options to offset increased expenses.
An important note: The wage for jobs requiring specified skills, education, and qualifications should be based on the cost of labor instead of the cost of living. A Compensation Analyst or Compensation Consultant can analyze what employers are currently paying and determine the prevailing wage or the market rate.
Living Wages in Idaho
How does Idaho rank in terms of living wages?
A search of the Living Wage Calculator shows that the living wage for a single adult with no children is $14.12 per hour, or a full-time salary of $29,370. A family of four in Boise, Idaho with a single income must earn $31.86 per hour, or a full-time salary of $66,269.
By comparison, Idaho’s minimum wage as of 2021 matches the federal rate of only $7.25 per hour, which is barely more than half the living wage for a single worker.
There are substantial differences from state to state and from city to city. The chart below shows the living wage for a single adult with no children for various locations.
Your business should be aware of the living wage for your area. It is a tangible data point in determining what a company should pay employees. Just as companies cannot be expected to sell products for an amount less than it costs them to produce the product, companies cannot expect employees to devote their full working time for less than it costs them to pay their living expenses.
As a reminder, the living wage is calculated for full-time jobs. It is not meant for full-time students, temporary employment, seasonal work, or part-time jobs.
Continue to be mindful of how the living wage affects your organization. The large gap between the minimum wage and the calculated living wage will likely continue to have potential repercussions going forward.