At the heart of most conversations about income inequality and the minimum wage is the idea of a living wage. But far too often people get tripped up — either by fundamental misunderstanding of the term, worries about inflation, or even ideas of collectivism — and tune out before getting a full grasp on the living wage’s importance.
What we traditionally thought of as the minimum wage has morphed into the living wage. Originally enacted in 1938 by president Roosevelt, the first minimum wage was set at 25 cents per hour — enough to cover basic necessities at the time. Since then, the minimum wage has been decoupled from the cost of living and sits at a federally-mandated level of $7.25, although local governments across the country have raised it on their own.
While many would argue that a minimum wage job isn’t supposed to supply enough money to live comfortably or raise a family on, the whole purpose was to give workers enough to cover the basics. That is, food, clothing, and shelter. In its current state, the minimum wage isn’t cutting it.
Cue the calls for a living wage.
The term living wage refers to the amount an employee must earn to be able to afford a reasonable level of subsistence. That means paying for food, housing, transportation — the basic tenants of American life — without any wage subsidies from the government in the form of welfare. This can vary greatly from place to place and household to household, which makes a universal calculation seemingly impossible. The phrase itself is a bit nebulous as there are no specific legal or political definitions (with the exception of some areas that have living wage ordinances), but according to some Harvard literature, the living wage is “a wage and benefits package that takes into account the area-specific cost of living, as well as the basic expenses involved in supporting a family.”
What we’re seeing with the recent spikes in minimum wage levels in places like Seattle and San Francisco are attempts by local legislators to more closely align the minimum and living wages. Many cities in America are incredibly expensive to live in, and the basic idea is that since the cost of living is higher, workers at the very bottom of the wage scale should have their pay adjusted to account for that.
But the question at the heart of the issue is one that we at The Cheat Sheet have explored before: how much does the average, middle class American need to earn in order to get by? The answer, according to data collected by Gallup, is $58,000 annually for a family of four.
Does that mean $58,000 is where we can peg the living wage? Not necessarily. But it can give us a starting point.
As a starting point, however, it doesn’t do us a whole lot of good. One of the biggest factors in determining a cost of living is geography (think rent prices in Wichita versus San Francisco), and thus, having a one-size-fits all approach to a living wage doesn’t necessarily work. The fact of the matter is that what it means to be poor, and the living wage, are both relative.
For example, just compare the cost of living between 1938, when the minimum wage was enacted, to modern times. My Budget 360 did just such a comparison, and found that the U.S. dollar has lost an astounding amount of purchasing power thanks to inflation and a variety of other factors. How much or little each dollar gets you these days varies wildly from place to place.
Researchers at MIT have taken on the charge of figuring out just where, exactly, the living wage resides with its Living Wage Calculator. Again, depending on numerous factors, the answer will be different for everyone. Even so, MIT is rather clear in saying that the minimum wage and living wage are still separated by a considerable rift.
While this has covered the basics of a living wage, and the justification behind the calls to institute one, there is much more to dig into, such as whether a living wage would hinder economic growth, or if it should be federally-mandated. There’s no clear answer yet as to whether the living wage should or will be implemented nationally, but building a foundation as to what it is, and why it’s important, is essential going forward.
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