American Dream

Living Wage vs. Minimum Wage: What’s the Difference?

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When thinking about living wage vs. minimum wage, people often get confused. Both wages attempt to stabilize the minimum amount of money a worker should make in the United States, which is an important step in helping the working poor. They differ, however, in terms of what goes into the calculation, how they are regulated, and what criteria is used to determine the actual wage amount.

What Is the Living Wage?

The living wage is the amount of pay considered sufficient for you and your family to cover basic costs of living in a specific location. Economists and policymakers use this information to determine the relative financial health of workers when comparing their pay with their living costs.

There is no federal living wage law. However, more than 120 cities across the U.S. have established living wage laws applicable to employers who work on government contracts, whether at the state, county, or city level.

What Is the Minimum Wage?

The minimum wage, established by federal (specifically through the Fair Labor Standards Act), state, and local government law, sets the lowest wage an employer may legally pay their workers. The federal minimum wage, which hasn’t changed since it was set on July 24, 2009, is $7.25 per hour. That translates to $15,080 for a full-time, year-round worker.

States can set a minimum wage higher than the federal minimum, but not lower. All employers are required to pay whichever rate is higher: their state/local minimum wage, or the federal minimum wage.

Living Wage vs. Minimum Wage: The Key Differences

There are several key differences between the living wage and the minimum wage:

  • Calculation Criteria: The minimum wage is not connected to any government measurement of poverty, such as inflation or the cost of living. Its rate instead depends on Congress-approved raises, which are often influenced by the economy and business interests as a whole. The living wage calculates area-specific costs of living, including food, child care, health care, housing, transportation, and other necessities. While the minimum wage affects individual earnings, the living wage takes into account different household sizes, ranging from an individual to a couple with several children.
  • Regulation: The minimum wage is regulated by the federal government’s U.S. Department of Labor and/or by state and local governments if they choose to set a higher wage. A business typically must only comply with a living wage if it is set by a state/local government with whom that company has a contract.
  • Amount Dictated: While Congress determines the minimum wage, the living wage can be set by state and local governments or, for informational purposes, determined by economists such as MIT’s Living Wage Project.

Using This Information to Your Financial Advantage

Are you ready for a one-two financial punch that will put you and your family in the best position possible? During your next job search, do the following:

  1. Find a state you like that charges no income tax. There are seven: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
  2. Use MIT’s living wage calculator to find areas within that state that align with the salary range you’re aiming for or that you think you can get.

If you can’t find a zero-income-tax state you’d want to move to, look for one with a low tax rate so you can keep as much of your earnings as possible.

Armed with this information, you’ll be able to keep your family comfortable, negotiate reasonable salaries for future positions, and make informed decisions on whether moving for a job would be worth it.