What is a living wage?
A living wage refers to a theoretical level of income that allows an individual or a family to afford adequate housing, food and other basic necessities. The objective of a living wage is to enable workers to earn sufficient income for a satisfactory standard of living and to prevent them from falling into poverty. Economists suggest that a living wage should be substantial enough to guarantee that it is not spent more than 30% on housing.
Key points to remember
- A living wage is a socially acceptable level of income that provides adequate coverage for basic necessities such as food, shelter, childcare and health care.
- The living wage requires not to spend more than 30% on rent or mortgage and is sufficiently above the poverty line.
- It is often suggested that the living wage be slightly higher than the statutory minimum wage.
How a living wage works
The idea of a living wage and its effects on the economy are hotly debated. Critics argue that implementing a living wage establishes a wage floor, which hurts the economy. They believe that companies reduce the number of employees hired if they have to pay a raise. This creates higher unemployment, resulting in a dead loss, because people who would work for less than a living wage are no longer offered a job.
Proponents of a living wage, on the other hand, argue that paying employees higher wages benefits the business. They feel that employees who earn a living wage are more satisfied, which helps reduce staff turnover. This reduces the cost of recruiting and expensive training for the company. They also point out that higher wages boost morale. Employees with high morale should be more productive, which will allow the company to benefit from increased worker output.
The movement for workers to earn a living wage is not new. Boston shipwrights met in 1675 to demand higher wages. The American Federation of Labor (AFL), founded in 1886, offered a general living wage that adequately supported a family and maintained a higher standard of living than the European urban working class of the 19th century.
Living wage and minimum wage
Many commentators argue that the federal minimum wage should be raised to match a living wage. They point out that the minimum wage does not provide enough income to survive because it does not increase with inflation; the minimum wage can only increase with the action of Congress. Although the dollar minimum wage has increased since its introduction by President Franklin Delano Roosevelt in 1938, the dollar amount has declined since 1968.
For example, in 2020, the federal minimum wage was $ 7.25 an hour with a constant dollar value of $ 7.80 an hour. In 1968, the federal minimum wage was $ 1.60 an hour, but had a constant value of $ 10.75 an hour. Most states have their own minimum wage laws to try to align it more closely with a living wage; however, in some states, the minimum wage is lower than the federal minimum wage, in which case the federal minimum applies.