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What Is a Living Wage, and Why Do Employers Need to Know About It?

Compensation management is all about making sure employees receive the appropriate amount of pay for the work they do. Whether you’re a compensation analyst or the manager of a human resources department, it’s important to understand the methods used to calculate employee wages.

This guide answers several important questions, such as “What are living wages?” and “What is a livable wage vs. the minimum wage?” Learn more about these terms and find out how you might apply them in your workplace.

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Living wages definition

So, what are living wages? In simple terms, a living wage is hourly rate that’s high enough to cover an employee’s basic necessities, including food, housing and health care. The main purpose of a living wage is to keep families out of poverty.

Related: Cost of Living Adjustments: How to Know When to Award Them

The living wage movement

The concept of a living wage isn’t exactly new. In 1886, the American Federation of Labor and other labor organizations proposed a living wage that would allow workers to support their families and improve the general standard of living in the United States. Although their proposal didn’t gain much traction, it did lead to the passage of the Fair Labor Standards Act in 1938.

Also known as the FLSA, the Fair Labor Standards Act is one of the most important pieces of federal employment legislation. For example, covered employers must keep detailed time records for each employee, pay overtime to nonexempt employees who work more than 40 hours in a week and meet the federal minimum wage requirements. The FLSA also includes provisions designed to protect young people from job-related hazards.

Living wage campaigns of the 1990s

For more than 50 years after the FLSA went into effect, labor organizers focused their attentions elsewhere, so the concept of a living wage didn’t get much attention from the 1940s to the early 1990s. Finally, the City of Baltimore passed a living wage ordinance in 1994, igniting the “New Labor Movement.” Inspired by the results in Maryland, activists in other cities started campaigning for living wages in their communities.

For example, the Service Employees International Union partnered with community groups and other labor unions to launch the Living Wage Campaign. The campaign began when Los Angeles International Airport started outsourcing jobs to contractors instead of hiring union workers. After 3 years of hard work, their efforts paid off. Los Angeles passed the Living Wage Ordinance, which required city contractors and companies receiving financial assistance from the city to pay workers “nothing less than a prescribed minimum level of compensation (a living wage).”

The fight for $15

In 2012, two underpaid workers walked away from their jobs and started demanding a minimum wage of $15 per hour. Initially, the Fight for $15 campaign focused on the fast-food industry, but it grew to include teachers, home health aides, retail clerks and other workers who don’t earn enough money to survive.

What is a livable wage vs. a minimum wage?

Although the terms “livable wage” and “minimum wage” sound similar, they have different meanings. A livable wage is a one that’s high enough to cover an employee’s basic living expenses, while a minimum wage is the lowest wage permitted by law.

In the United States, the federal minimum wage has been $7.25 per hour since 2009. States are allowed to set their own minimums, but only if those minimums are higher than the federal one. For example, most businesses in New Mexico must pay their employees at least $12 per hour.

The problem with minimum wages is that they’re often not enough to live on. According to the Massachusetts Institute of Technology, two working adults earning the federal minimum wage would need to work 196 hours per week — 98 hours per person — to support themselves and two other family members. As a result, a truly livable wage is much higher than the minimum wages available throughout the United States.

Here’s an example. As noted previously, New Mexico has a minimum wage of $12 per hour. A single person in Bernalillo County, which contains the state’s largest city, would have to earn $16.10 per hour just to cover their basic living expenses. For a single person with one child, the living wage jumps to $33.61 per hour, more than triple the state’s minimum wage. One adult with three children would need to earn $56.44 per hour just to make ends meet.

Related: How Raising the Minimum Wage Might Affect Your Business

How offering a living wage benefits employers

Offering a living wage can have several potential benefits. First, employees may be more likely to stay with your organization if they’re satisfied with their wages. You may even be able to use living wages to convince high-quality candidates to work for you instead of accepting job offers at other companies.

Another advantage of offering a living wage is that employees may be more productive, especially if they’re not distracted by financial worries or struggling to balance side gigs with their full-time jobs. In a study conducted by researchers at the Northwestern University Kellogg School of Management, higher minimum wages incentivized employees to work harder.

Related: Setting Wages in a Competitive Market

Disadvantages of living wages

One of the biggest disadvantages of offering a living wage is that it’s expensive. If the living wage in your area is $22 per hour and you’re currently paying an average of $18 per hour, for example, you’d have to increase every employee’s pay by $4 per hour. With 200 employees working 2,080 hours per year, that’s nearly $1.67 million in extra compensation costs.

Another drawback is that every employee needs a different amount of money to cover their basic living expenses. For example, a single employee who rents an inexpensive apartment and doesn’t have any chronic health problems needs much less than an employee with two children who also has to pay for insulin every month. If the living wage you offer isn’t high enough to satisfy every employee, it may reduce morale instead of increasing productivity.

Finally, there’s no guarantee that offering a living wage will increase productivity or make your employees happier. If you’re focused on implementing a new pay structure, you may not notice that your team members want better benefits or more flexible work hours.

FAQs about living wages

What are some alternatives to a living wage?

Job guarantees, universal basic income and collective bargaining are some of the potential alternatives to a living wage. Under the New Deal signed by President Franklin D. Roosevelt, the U.S. government created the Public Works Administration to improve the nation’s infrastructure and provide jobs to out-of-work Americans. This is one of the best-known examples of a job guarantee.

Universal basic income is when a government makes recurring payments to its citizens. These payments are based on need, so everyone receives the same amount without regard for their family size, income or assets. Collective bargaining allows industries to negotiate minimum wages for their workers. Negotiated wages are much higher than the federal minimum wage.

Related: Minimum Wage by State

What is the difference between income and a living wage?

Income is the amount of money a person receives by working and/or investing. It’s different from a living wage because the amount earned isn’t necessarily enough for an individual to pay for housing, food and other basic necessities.

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