As organizations begin their budgeting process for 2025, it is important for them to understand the concept of a living wage and to determine whether they are paying their employees a fair living wage. If they determine that they are not, they may want to include sizable pay equity increases in their payroll budgets for next year? This article will introduce the concept of a living wage and hopefully inform employers on how to determine if they are paying a fair living wage to their employees.
The Global Living Wage Coalition (www.globallivingwage.org) reports that there are some 60-plus definitions and descriptions of the term living wage. Despite some differences, the organization found certain common themes when comparing how it is defined in human rights declarations by non-governmental organizations and others. According to the Global Living Wage Coalition, their definition of a living wage is as follows:
The remuneration received for a standard workweek by a worker in a particular place sufficient to afford a decent standard of living for the worker and her or his family. Elements of a decent standard of living include food, water, housing, education, health care, transportation, clothing, and other essential needs including provision for unexpected events.
The idea of a living wage is not new, but it has become a hot topic for many since 2009. The idea has originated over time in the United States through the following actions:
- The movement originally started in 1675 when Boston ship carpenters came together to demand higher wages.
- Founded in 1886, the American Federation of Labor, 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.
- In 1938, Congress passed the Fair Labor Standards Act (FLSA), which established the first national minimum wage of $.25 per hour. The passage of the FLSA marked a turning point for the labor movement in America.
- In 1968, the federal minimum wage was set at $1.60 an hour, but its increase slowly declined after the late 1960s due to inflation. Today the $1.60 per hour is equal to about $14.23 per hour. Yet, the federal minimum wage has not increased since 2009, where it remains at $7.25 per hour. Due to the lack of increase in the federal minimum wage, many states, cities, towns, etc. have increased their minimum wages higher than the set federal minimum wage.
- In 2022, the living wage was $25.02 per hour, or $104,077.50 per year before taxes, according to research by MIT. The figure is based upon a family of four with two working adults. Each adult would have to work 52-weeks a year, earning at least $52,038.85 or $25.02 for a 40-hour workweek. Many states have living wages higher than the federal living wage and others have lower living wages compared to the federal rate. Employers who would like to calculate the living wage for their state may click on the following link. https://livingwage.mit.edu
A living wage should not be confused with a minimum wage, which is the least amount of money that an employee may earn, or an employer may pay an employee for their services, as mandated by federal, or state laws. Keep in mind that the federal minimum wage may only increase with congressional action, thus does not increase with inflation. As stated previously, there are many states that have increased their state-mandated minimum wage amounts to better align with a living wage, thus providing more income to a worker, but the federal minimum wage has not kept up with the cost of living since the late 1960s. Employers who are paying employees the federal minimum wage of $7.25 per hour are not keeping up with the federal poverty level of $31,200 annually, or $15.00 per hour in 2024, thus are not paying enough money to their employees to be classified as a living wage in the United States.
According to an article on Salary.com, paying an employee a living wage allows families to escape poverty and boost local economies. A living wage may address rising inequalities in pay and promotes fair wages that balance economic realities. Critics state that a living wage may reduce poverty, but slows job growth. According to research, wage increases have an insignificant effect on employment. An increased minimum wage brings benefits to both employees and businesses and also helps to reduce turnover and boost productivity. (Living Wage: Definition, History, and How to Calculate It, www.salary.com , September 27, 2023)
Other proponents of the living wage state that they reduce corporate costs associated with recruitment and training. Higher wages improve employee morale and may often lead to higher productivity. This in turn allows organizations to benefit from increased worker output. (What is a Living Wage? Definition, History, and How to Calculate, www.Investopedia.com , July 26, 2024)
Naysayers of providing living wages believe that it creates wage floors and that this harms the economy by hurting businesses, especially small businesses that may not be able to afford the higher wages. They also state that organizations may reduce their hiring due to having to pay higher wages, which creates unemployment through deadweight loss. (What is a Living Wage? Definition, History, and How to Calculate, www.Investopedia.com , July 26, 2024) Deadweight loss is an economic inefficiency that occurs when supply and demand are out of balance, resulting in a loss to society.
So, how do employers calculate whether they are paying a living wage to their employees? First, determine the local family living costs. A living wage must be enough to cover housing, food, transportation, and healthcare, at a minimum. Second, review other costs to include: clothing, household goods, personal care, and a budget for emergency savings. Finally, consider the average family size. The living wage must cover household expenses for more than one person. Add costs, expenses, and family size to find your community’s annual living wage. Compare this wage to medium incomes and minimum wages to determine livability. Or, employers may also use an online calculator to do the work for them. https://livingwage.mit.edu
The bottom line is that a living wage is a hypothetical level of income that is meant to show how much money is necessary for employees to be able to afford things like food, shelter, and transportation. The number depends upon the area where an employee lives, as well as certain economic factors. A living wage ensures fair compensation, so employees may be able to afford a decent standard of living, escape poverty, and maybe even stop working more than one job. Thus, employers should determine their local standard and determine how much is needed by their employees in order to set livable wages, and then adjust their payroll budgets accordingly.
For additional information related to living wages, please contact us at www.newfocushr.com .
Written by: Kristen Deutsch, M.B.A., CCP
President
09/25/2024
