What It Is
The minimum wage in the US is the lowest hourly wage that an employee can legally be paid for his or her labor. As of August 2013, the federal minimum wage is $7.25 an hour. Minimum wage is part of the Fair Labor Standards Act (FLSA).
Many states also have minimum wages, some higher and some lower than the federal wage. In addition, some localities within states have their own minimum wages. For instance, the city of Albuquerque, NM has a minimum wage of $8.50 for jobs without healthcare and/or childcare benefits, or $7.50 with healthcare and/or childcare benefits.
While state or locality minimum wages that are lower than the federal minimum wage may seem superfluous, there are some limited exemptions to the federal minimum wage law. For instance, farm workers are not covered by the federal minimum wage. In these instances, state and locality wage laws may apply for these workers.
A living wage is the wage a person must earn to cover basic living expenses, such as housing, food, and medical costs. This number varies depending on the region and on how many people the wage must support. For instance, the living wage for a single adult will be lower than for an adult who is supporting a partner and one child, and would be higher in Manhattan than in rural Arkansas.
Why It Matters
Providing at least the minimum wage to workers ensures that he or she will be able to provide for him or herself, and in many cases, his or her family. The federal minimum wage is not tied to inflation or adjusted by region, and consequently, many adults earning minimum wage still fall below the federal poverty level. In real terms, the minimum wage has dropped over the decades. If the minimum wage had kept up with inflation over the past forty years, it would currently be $10.74, and not $7.25. Despite stereotypes to the contrary, significant numbers of minimum wage workers are adults whose income comprises 50% or more of their family’s overall income.
Poverty in the United States
The official poverty level for a household of four individuals is currently around $23,500. Roughly 16% of Americans live below the poverty line, and 22% of American children do. An additional 1 in 3 Americans live on 200% of the poverty threshold.
The federal poverty threshold was established in 1963 by determining at what income level a family would have to spend more than 33% of their income on food. However, since the 1960s, the real cost of food has dropped, but the cost of many other basic necessities, such as housing, childcare, education, and medical care has risen considerably.
Additionally, the cost of basic necessities varies by region and over a person’s lifetime. Working parents must either pay for childcare or give up one income to care for their children, while seniors often put a large percentage of their income and savings towards healthcare costs. These and several other factors complicate the issue of defining poverty in the United States, and few research institutes studying poverty in the US agree that the federal poverty line is an accurate picture of poverty in the US.
If you work, you should not be poor: providing living wages
Living wage estimates attempt to clarify the poverty issues by focusing on how much income a household needs to meet basic expenses. This income is called the living wage, and it is usually around 200% of the federal poverty line. However, living wages vary significantly by region because of differences in the cost of living. Households that do not earn a living wage may have difficulty making ends meet if they do not have access to other financial safety nets. This could include support from their extended family and accrued savings.
The federal minimum wage consistently falls below the living wage rate in most areas of the United States. What this means is that individuals earning minimum wage typically do not earn sufficient income to support themselves. This is particularly true of individuals who are working to support children or other adults in the home. Workers earning less than a living wage but above minimum wage may still face significant financial hardships.
Paying all employees a living wage that reflects the cost of living in your area will minimize the chances that they will face these financial hardships or fall into poverty. Furthermore, higher wages make good business sense. Recent studies have shown that rather than decreasing the number of available jobs (a common argument against raising minimum wage) because businesses have less money to spend on wages, that minimum wage increases slightly raise employment levels. This is attributed to higher level of employee effectiveness and lower turnover rates. That is to say, not surprisingly, that employees work better and are more committed to the organization when they are paid more.
In addition to benefiting workers, higher wages also help the economy by increasing workers’ disposable income. If a person’s income is used entirely for necessities, very little will go towards optional consumer goods. One study argues that raising the minimum wage to $9.80 would benefit 28 million Americans currently working for less than $9.80 an hour and create around 100,000 new jobs nationally because of increased spending.
Go through the following steps to determine what you will pay your employees.
- Step one: Establish what the minimum wage is in your location.
- Step two: Determine what would be considered a living wage in your area.
- Step three: Determine the average pay ranges for various occupations at your place of work.
- Step four: Using information from steps two and three, figure out what salaries will make your positions competitive and allow your workers to thrive.
Step One – Establish what the minimum wage is in your location
Your first step is simply to determine what the minimum wage is for your area. In addition to the federal minimum wage, your state and locality may have minimum wage laws. The stipulations that come with these minimums may be different than the federal minimum wage. They may cover a wider range of occupations, such as farm workers and servers who earn tips, or be higher or lower depending on whether or not an organization offers others benefits.
The United States Department of Labor provides a map for finding states’ minimum wage laws.
Step Two – Determine what would be considered a living wage in your area
The next step is more complicated: determining a living wage in your area. Living wages cover the cost of necessities. They reflect the cost of housing, food, childcare, taxes, transportation, medical care, and essential bills (such as utilities) in your region.
Luckily, there are tools online that can help. The two most commonly used and reputable tools are the Economic Policy Institute (EPI) Family Budget Calculator and the Massachusetts Institute of Technology (MIT) Living Wage Calculator. These allow you to specify the county or urban area in which your business is located.
You’ll notice when you look at these tools that they display information in different ways and yield very different final numbers. For instance, a family consisting of two parents and one child living in the Raleigh metro area of North Carolina requires a yearly income of roughly $38,000 according to the MIT calculator. The EPI calculator says this same family will need $57,000 a year.
That is a huge difference—but luckily these calculators also break down their estimates by category so that we can determine what accounts for the difference. Their numbers for most variables are very similar. They are only very different for childcare and healthcare. The MIT calculator factors in $0 for childcare every month. The MIT model is based on establishing an hourly wage for an adult worker taking care of his or her entire household, that is, it assumes the second adult does not work. Consequently, this model assumes that the other adult in this household will take care of the child and they will not have childcare costs.
The EPI model estimates the yearly income needed for an entire family, and does not assume that one adult will be providing childcare. Most two-parent families are also two-income families, and consequently do use daycare. Monthly childcare is likely to be an expense for most working families, and so this model may be more accurate for childcare costs.
The EPI calculator also estimates healthcare costs at nearly $1000 a month higher than the MIT calculator ($1318 versus $374). This is probably because the EPI number is premised on what families in this area would pay on average to cover health insurance costs not covered by their employer, while the MIT number reflects what people who do not have insurance pay for healthcare.
These are just conjectures, but at least on the healthcare cost issue, as an employer you are in a position to know how much coverage employees have through their place of work and what they portion of their insurance costs that they pay. You can increase or decrease this number accordingly, remembering to add in some for co-pays and related costs even if you provide full coverage.
These very specific differences between the calculators—between childcare and healthcare costs—underscore to the larger difficulty of how to determine a living wage for individual employees when their households vary widely. Their marital status, numbers of children, and the presence of other adults (such as parents) in the household will vary. They may or may not have another working adult contributing to their income.
You will know best what kind of worker your business attracts in general, and that you’d like to attract. If your workforce is largely middle-aged and has children and a spouse that works, or is largely young and single, these tools can give you a sense of what kind of income they would need to meet expenses, and therefore what kind of income would keep them at your place of work.
Using these tools, what kind of salary would you need to pay your workers so that they would earn a living wage?
Step Three – Determine the average pay ranges for various occupations at your place of work
You should also know the salary ranges for the various occupations at your place of work. The United States Bureau of Labor Statistics publishes wages by area and occupation that is a good starting point for determining this information.
What salaries are competitive with industry standards for the various occupations at your place of work?
Step Four – Using information from steps two and three, figure out what salaries will make your positions competitive and allow your workers to thrive
Compare your living wage number to the wages statistics for the various occupations at your organization. For some occupations, the living wage will be exceeded by industry standard wages. Industry standard wages are only likely to be lower than the living wage for lower paying occupations. For occupations whose pay rates fall below the living wage for your area, increase these pay rates to be as close the living wage as you can afford.
Green Plus recommends as a very rough measure that all employees should be paid 200% of minimum wage. This may be more than adequate for some regions and insufficient for others, but it is a good place to start. Consider our Raleigh, NC example: the EPI calculator indicates that a family of four would need to earn $65,000 a year to cover basic expenses. If we assume both parents contribute roughly 50% to the household’s income, each parent would need to earn about $15 an hour, or, almost exactly 200% of the current minimum wage.
- Step one: Factor in the benefits that your company offers, such as health insurance, and their effect on the real income that employees receive.
- Step two: Establish an organization-wide “minimum wage” or “living wage.”
- Step three: Advertise your commitment to offering a living wage to prospective employees and clients.
Step One – Factor in the benefits that your company offers, such as health insurance, and their effect on the real income that employees receive
Benefits, such as health insurance, disability insurance, and childcare benefits, are an important part of a total compensation package. Employer sponsored benefits are often a win-win for employers and employees. Employers are in a position to bargain for better group rates than individual employees, meaning that employers are often able to provide these benefits at a lower cost than if the employee paid for it themselves. This means that employer-sponsored health insurance is very likely to have a greater value to a potential employee than a raise in salary equivalent to what the company would pay for insurance premiums.
Furthermore, these benefits have a value that exceeds the monetary value of the monthly premiums paid for enrollment in health and disability insurance. Having workers who are covered provides an important safety net for workers and employees. It shields workers to a large extent from the cost of health crises that would be near impossible to save up for, such as an extended stay in the hospital due to an accident. Employees who have health insurance are more likely to seek medical care when they need it and be healthier overall.
Short-term disability insurance protects both the worker and the employer. By providing workers with a percentage of their income if they have an illness that takes them away from their job temporarily, they are more likely to be able to take time to recover and not go into serious debt. You will not have to replace an employee who might be otherwise forced to quit their position entirely.
For these reasons, benefits are an important factor in determining what constitutes a living wage. It’s not surprising that our two living wage calculator differ most radically in what they estimate for health care costs. Evaluate what benefits you currently provide and their impact on employee’s financial well-being. If you do not provide benefits, price these options to see if the additional cost of employee-sponsored health insurance (paid for in full or in part by the organization), short-term disability insurance, or even childcare stipends or services, will have a bigger impact on employee’s living wage than direct salary increases.
Step Two – Establish an organization-wide “minimum wage” or “living wage”
Some organizations have an organizational minimum wage. These are often large institutions like universities. For instance, in 2005 the UNC Health Care system raised its minimum wage from $9/hr to $10/hr (the North Carolina state minimum wage was just $6/hr at that time).
Consider establishing a minimum wage standard for all employees at your organization. What pay rate would ensure that all of your employees could afford basic necessities in your region?
Step Three – Advertise your commitment to offering a living wage to prospective employees and clients
Once you establish an organizational minimum wage, advertise it. This will be relevant not only to prospective employees, but also signal to current employees that you care about your entire workforce’s well-being. Engineers at your organization may never be in danger of making less than a living wage, but the knowledge that janitors and receptionists at the organization are also guaranteed a living wage is likely to increase everyone’s commitment to the organization.
You should also advertise this information to customers and clients, particularly if you are in an industry that employs a high number of low-wage workers. This includes restaurants and retail operations. As a small or mid-size business, one way distinguish yourself from large chains is by advertising the steps you’ve taken to be more socially responsible. Many consumers want to be assured that their purchases are having a positive impact on their community and the environment. There is no better place to start than with your own workforce.
- Step One: Contract with suppliers and other service providers who provide their employees with a living wage or who have an organizational minimum wage that approximates a living wage.
- Step Two: Think globally.
Step One – Contract with suppliers and other service providers who provide their employees with a living wage or who have an organizational minimum wage that approximates a living wage
When possible, use suppliers and other service providers that have committed to paying their employees a living wage or that have organizational minimum wages that approximate this. This could include any number of services that you hire out, such as janitorial services.
Step Two – Think globally
It may be hard to figure out, but if you work with materials produced in other countries, do you have a sense of the labor conditions at the organizations that produced them? Look for indicators that may give you a sense of what conditions these items were produced in, such as fair trade certifications or ISO 26000 standards. You can start by talking with your suppliers, or by identifying a few products that you use in abundance get a sense of your social impact further down the line.
“The Business Case for Raising the Minimum Wage” summarizes two studies as an example of the positive impact living wages can have:
“A 2003 study of the effects of a wage increase for workers at the San Francisco Airport found that annual turnover among security screeners plunged from 95 percent to 19 percent when their hourly wage rose from $6.45 to $10 per hour. After wages increased at the airport under a living wage policy, 35 percent of employers reported improvements in work performance, 47 percent reported better employee morale, 44 percent reported fewer disciplinary issues, and 45 percent reported that customer service had improved.”
“A 2005 study of the effect of a living wage policy for firms that contract with the city of Los Angeles found that staff turnover rates at firms affected by the policy averaged 17 percent lower than at firms that were not affected.”
Resources for More Information
- Economic Policy Institute Family Budget Calculator
- Massachusetts Institute of Technology Living Wage Calculator
- United States Bureau of Labor Statistics, Wage Data by Area and Occupation
- Fair Labor Standards Act Advisor, United States Department of Labor
- Minimum Wage, United States Department of Labor
- Poverty, US Census Bureau
- Living Wage and Self-Sufficiency Resources, Labor Center, UC Berkeley
- Economic Policy Institute
- National Poverty Center, Gerald R. Ford School of Public Policy, University of Michigan
- “What are poverty thresholds and poverty guidelines?” Institute for Research on Poverty
- Thomas B. Edsall, “Who Is Poor?” New York Times
- “Debate Over What Constitutes A Living Wage,” Diane Rehm Show
- “How America’s Losing the War on Poverty,” NPR
- “The Business Case for Raising the Minimum Wage,” Raise the Minimum Wage
- Jared Bernstein, The impact of living wage ordinances on the public contracting process
- Stephanie Luce, Fighting for a Living Wage
- Stephanie Luce and Robert Pollin, The Living Wage: Building a Fair Economy
The United States minimum wage does not provide most individuals who earn minimum wage with sufficient income to cover the cost of living. Rather than base your wages on state and federal minimum wage, organizations should determine the cost of living in their area, and then determine pay rates that will ensure that all employees are financially secure.
Glossary of Related Terms
ISO 26000 standard: ISO 26000 is a guiding standard for businesses international seeking to make their organization more socially responsible. Unlike other ISO standards, organizations cannot become certified ISO 26000, that is, it is an educational standard that provides guidance, not requirements.
Fair trade: Fair trade is a movement that seeks to ensure that producers in the developing world earn decent wages for their work and labor in safe conditions. Fair trade certifications certify particular products as having been produced under certain minimum labor and environmental standards. Fairtrade International coordinates fair trade certifications for most developing nations.
Living wage: This is the wage a person would need to earn to cover basic necessities for their household in their region. This is closely tied to the cost of living, and varies depending on the number of people in the household, their age, and whether or not more than one adult in the household is employed.
Minimum wage: This is minimum legal wage that employers can pay employees. It is usually described in hourly terms. The federal minimum wage is currently $7.25/hr, however, many states have their own minimum wage laws, and municipalities may also have minimum wages that are higher than this.
Poverty line or threshold: This is the income level at which the US government determines that a particular household is poor. This is calculated based on a 1960s formulation that decided that poverty was roughly equivalent to how much a household spent on food: if a household spent more than a third of its income on food, it was considered poor. The poverty line for a family of four in the United States is currently around $23,500 annual income. This does not take into account regional variations.
Cost of living: This reflects the price of goods and services necessary for living in a particular area or region. Cost of living calculations include the cost of housing, food, utilities, transportation, childcare, medical care, education and other needed consumer goods, such as clothing, in a particular area. This varies considerably across the United States. Rural areas tend to have lower living costs, and metropolitan areas have higher costs. Some metropolitan areas, such as San Francisco and Manhattan, are known for their extremely high living costs.
 “Minimum Wage,” United States Department of Labor, http://www.dol.gov/whd/minimumwage.htm, accessed 3 August 2013.
 “Minimum Wage Ordinance Notice,” City of Albuquerque, 1 January 2013, http://www.cabq.gov/clerk/documents/NoticeEnglish.pdf, accessed 3 August 2013.
 A list of commonly claimed federal minimum wage exemptions can be found here: “Fair Labor Standards Act Advisor: Exemptions,” United States Department of Labor, http://www.dol.gov/elaws/esa/flsa/screen75.asp, accessed 3 August 2013.
 “Facts,” Raise the Minimum Wage, http://www.raisetheminimumwage.com/facts/, accessed 4 August 2013; see also: “State of Working America preview: The declining value of minimum wage,” Economic Policy Institute, http://www.epi.org/publication/state_of_working_america_preview_the_declining_value_of_minimum_wage/, accessed 3 August 2013.
 The following article has several demographic statistics about the workforce currently earning under $9.80/hr: Doug Hall and David Cooper, “How raising the federal minimum wage would help working families and give the economy a boost,” Economic Policy Institute, 14 August 2012, http://www.epi.org/publication/ib341-raising-federal-minimum-wage/, accessed 3 August 2013.
 “Preliminary Estimate of Weighted Average Poverty Thresholds for 2012,” United States Census Bureau, http://www.census.gov/hhes/www/poverty/data/threshld/, accessed 3 August 2013.
 “How America’s Losing the War on Poverty,” NPR News, 4 August 2012, http://www.npr.org/2012/08/04/158141728/how-americas-losing-the-war-on-poverty, accessed 3 August 2013.
 Thomas Edsall, “Who Is Poor?” New York Times, 13 March 2013, http://opinionator.blogs.nytimes.com/2013/03/13/who-is-poor/, accessed 3 August 2013.
 Elizabeth Warren and Amelia Warren Tyagi, The Two-Income Trap: Why Middle Class Parents Are Going Broke (New York: Basic Books, 2003), chapter 2.
 Many federal safety net programs, such as WIC and SNAP, use the federal poverty line as a reference but do not require that families fall below to receive benefits. For instance, a program may be eligible to individuals or families with incomes within 135% of the poverty line. However, depending on the region of the country, these programs may not be available to many households whose income exceeds these guidelines but that do not earn a living wage.
 Johnny E. Williams, “Higher Minimum Wage Good for Workers, Economy,” Institute for Research on Labor and Employment, 19 February 2012, http://www.irle.berkeley.edu/press/20120219_courant.html, accessed 3 August 2013.
 Doug Hall and David Cooper, “How raising the federal minimum wage would help working families and give the economy a boost,” Economic Policy Institute, 14 August 2012, http://www.epi.org/publication/ib341-raising-federal-minimum-wage/, accessed 3 August 2013; see also: Emily Martin and Arjun Sethi, “Equal Pay Day: Raising minimum wage will help women—and the economy,” Christian Science Monitor, 9 April 2013, http://www.csmonitor.com/Commentary/Opinion/2013/0409/Equal-Pay-Day-Raising-minimum-wage-will-help-women-and-the-economy, accessed 3 August 2013.
 For more information on the reasons for the increase in families where both parents work, see: Elizabeth Warren and Amelia Warren Tyagi, The Two-Income Trap: Why Middle Class Parents Are Going Broke (New York: Basic Books, 2003).
 “UNC Health Care raises minimum wage to $10,” Triangle Business Journal, 19 September 2005, http://www.bizjournals.com/triangle/stories/2005/09/19/daily6.html, accessed 4 August 2013.
 There are many, many articles and studies on ethical consumption, but here is just one to start with: “The good consumer,” The Economist, 17 January 2008, http://www.economist.com/node/10491144, accessed 4 August 2013.
 Both case studies are from: “The Business Case for Raising the Minimum Wage,” Raise the Minimum Wage, http://www.raisetheminimumwage.com/pages/business-case, accessed 4 August 2013.