Have you heard the term “living wage”? What is it, and how does it differ from similar terms like minimum wage or prevailing wage? Let’s take a look.
What is a Living Wage?
A living wage refers to the wage level it would take to meet regular living standards for a given area. What is included in the calculation may vary, however, depending on who you ask.
For example, basic needs—things like shelter, clothing, and food—are always included. Often, things like medical expenses, transportation, and child care are also a part of the basic calculation. But, which exact expenses are used and how they are tallied may vary. Things like entertainment, communication costs, and debt repayments—though a normal part of living expenses for most of us—are often left out.
Once expense inclusions are decided, the living wage is usually calculated for each family size. For example, it costs less to feed and house an individual than it does a family of five, and this needs to be taken into account in the results.
The idea behind calculating a living wage is that it opens the discussion for what appropriate minimum wages should be. In some states and municipalities, the living wage has become the basis for living wage ordinances or living wage laws which, in effect, become minimum wage laws for that area.
This is important because federal and even state minimum wages may not be sufficient to pay for typical living expenses in all areas, especially since our federal minimum wage is not currently tied to inflation or cost-of-living changes. In areas where the minimum wage is not enough to pay for basic living costs, employees who are working for minimum wage and who do not rely on government assistance programs will have greater hurdles to make a living. For employers, this can mean greater turnover if employees are constantly seeking ways to make more money.
What is the Difference Between Living Wage, Minimum Wage, and Prevailing Wage?
What is the difference between a living wage, a minimum wage, and a prevailing wage? While all three of these might refer to wages in some fashion, there are several differences.
From a legal standpoint, minimum wage is mandated federally by the Fair Labor Standards Act and also at the state and, in some cases, local level. Living wage laws and regulations are less common (quite uncommon, in fact, from a legal standpoint) but do exist in some areas. When existent, they are frequently implemented at the local level, such as in a city or municipal region. Much more commonly, a living wage is not a regulation, but simply an assessment of what is considered a living wage for a specific area—without the attendant legal requirement to pay that amount. (As noted above, the calculation also varies.)
Minimum wage is usually fixed (though this is slowly changing) and is not dependent on other factors like the cost of housing. Living wage, on the other hand, is relative—what is considered to be a livable wage will vary depending on the costs that wage must cover and how those costs fluctuate. As such, achieving the same standard of living (and thus setting a living wage) will require a different wage in areas where living expenses differ. (Note: As our minimum wage laws continue to be updated, more states are beginning to tie automatic minimum wage increases to cost-of-living changes. This does not necessarily equate to a living wage, but it does mean some states are taking increases in expenses into account.)
Prevailing wage, on the other hand, refers to the wage level paid to the majority of workers in a particular job in a specific geographic area. It is actually calculated by the Department of Labor because this is relevant for government contracts. Prevailing wage calculations come into play in a legal way primarily because the Davis-Bacon Act of 1931 requires prevailing wages (at a minimum) to be paid to workers involved with government contracts. This was done in order to ensure that undercutting wages was not how a contracting company would underbid a competitor.
Does your organization take living wage into account in your compensation strategy? Do you handle government contracts in which prevailing wages must be paid? How has this impacted your business?
*This article does not constitute legal advice. Always consult legal counsel with specific questions.
About Bridget Miller:
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.