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 life 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 it should be enough to ensure that no more than 30% of this income gets spent on housing.

A living wage is often substantially higher than the legal minimum wage. The living wage at the federal level was $25.02 per hour for a family of four with two working adults at the close of 2022, the last year for which statistics are available. Two working adults earning $20 an hour each or $41,600 a year wouldn't reach this threshold to adequately support themselves and their two children.

How a Living Wage Works

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

The consensus is that a living wage provides individuals with enough income to support themselves without falling below the federal poverty line (FPL). 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 necessities
  

The idea of a living wage isn't new but 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 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.

The living wage in the United States was $25.02 per hour in 2022 or $104,077.70 per year before taxes, according to research from MIT. This figure is based on a family of four with two working adults. Each adult would have to work 52 weeks a year, earning $52,038.85 or $25.02 for a 40-hour workweek. That's an increase from $24.16 or $100,498.60 per year in 2021.

These figures can vary by family size and the cost of living in a particular city or location.

History of the Living Wage

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, 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.

Congress passed the Fair Labor Standards Act (FLSA) in 1938, which established the first national minimum wage of $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 $14.23 per hour in 2023 dollars), but unfortunately, it slowly declined after the late 1960s due to inflation.

The federal minimum wage rose to $7.25 in 2009 where it remains in 2024. Many states, cities, and municipalities have minimum wages higher than the federal minimum wage. These minimum hourly rates increased in 22 states in 2024 for as many as 9.9 million workers. California and areas of New York City increased their minimum wages for nonexempt workers from $15.50 and $15 respectively to $16 per hour.

Living Wage vs. Minimum Wage

A living wage can't be confused with a minimum wage which is the least amount of money a worker can earn as mandated by law. Many experts argue that the federal minimum wage should be increased to align with a living wage. They point out that the minimum wage doesn't provide enough income to survive because it doesn't rise with inflation. The minimum wage can only increase with congressional action.

The minimum wage dollar amount has risen since its introduction by President Franklin Delano Roosevelt in 1938 but the constant dollar amount, which accounts for the effects of inflation, has decreased for American households since 1968. The federal minimum wage of $7.25 per hour has remained at that level since 2009. It hasn't kept up with the cost of living since the late 1960s.

The federal minimum wage was $1.60 per hour in 1968 but it had an inflation-adjusted value of about $14.23 per hour. Most states have their own minimum wage laws to try and align it more closely with a living wage but it's actually below the federal minimum wage in some states. The federal minimum applies when this occurs.

The U.S. House of Representatives passed an amended version of the Raise the Wage Act in 2019 that 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. Several states and cities nonetheless raised the local minimum wage and several companies have done so voluntarily.

This table indicates the rates for 2023 and 2024 for the 22 states that raised their rates in 2024.

Living Wage and Poverty Levels

Poverty in the U.S. may have something to do with the lack of a living wage in all states, at least to an extent. The Raise the Wage Act of 2021, an updated version from 2019 that was introduced in January 2021, could potentially help reduce or eliminate low wages that don't 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 isn't enough to raise a family of four above the federal poverty level: $31,200 in 2024. 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. The ideas surrounding them and their effects on the economy are hotly debated.

Advantages

Supporters of a living wage argue that paying employees higher salaries 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 improve employee morale and this can often lead to higher productivity. This in turn allows companies to benefit from increased worker output.

Disadvantages

Some critics suggest leaders should scrap the idea of living wages altogether. Naysayers believe that implementing a living wage establishes a wage floor and this harms the economy by hurting companies, especially small businesses that can't afford to raise salaries.

Companies may reduce the number of employees hired if they're forced to pay increased wages. This creates higher unemployment, resulting in a deadweight loss. People who would work for less than a living wage are no longer offered employment.

Calculating the Living Wage

Earning a living wage means that you can pay necessary costs including shelter, food, healthcare, childcare, taxes, and transportation. It can vary depending on your circumstances, including the state and town in which you live. MIT created a Living Wage Calculator in 2004 that's 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. First plug in the state then choose from a list of counties. The calculator shows 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 option is a universal basic income from the federal government that covers basic living costs. Various plans address 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. doesn't offer this type of income as of 2024 but some might suggest that President Biden's $1.9 trillion American Rescue Plan was a step in this direction. Families who qualified received government-issued cash benefits for each child in July 2021 but the program lasted only for 2021.

The Bottom Line

A living wage is a hypothetical level of income that's meant to show how much money is necessary for people to afford things like food and shelter. This number depends on certain economic factors including inflation and the cost of living in an individual's area. There's no concrete number because it can vary based on who's calculating it. The consensus is that it should be enough to help keep people out of poverty, however.