Minimum Wage vs. Cost of Living: How Do They Compare?

On average, the minimum wage still only covers 54% of the costs of living for a family of four with two working adults.

What the US gets wrong about minimum wage

What is cost of living?

Cost of living is not a federally mandated figure. Instead, its a calculation that refers to the amount of money, or income, the average person needs to have a reasonable standard of living. You can use the cost of living to calculate the living wage, which is the amount a full-time worker has to earn in order to remain above the federal poverty level.

Like minimum wage, cost of living can change significantly from city to city or state to state. A living wage calculator can consider the cost of living in a given place and determine the hourly wage you must earn to live above the poverty line.

Inflation rate is another important factor for calculating a living wage, as this figure affects the value of your earnings over time. You have to adjust the cost of living for inflation to get an accurate assessment of the living wage at a given moment in time.

To calculate the cost of living, you can use a price index or calculator that considers the cost of necessities like food, rent, health care, transportation and taxes. This type of index also factors in the cost of living in a given location, providing results for specific cities or states. A cost of living index has practical applications like:

What is minimum wage?

Minimum wage refers to the base-level amount employees must receive for full- or part-time work. The minimum wage is legally mandated and was designed to ensure that workers can live above the poverty level. In practice, however, the minimum wage doesnt necessarily cover the cost of living or the price of basic necessities.

The federal government oversees the minimum wage under the Fair Labor Standards Act (FLSA). The first federal minimum wage was set in 1938, and it has been raised over a dozen times since then. Since 2009, the federal minimum wage has been set at $7.25 per hour, which equals a salary of just over $15,000 per year.

Some states set their own minimum wages, which are higher than the federal minimum wage. In many cases, these figures more accurately reflect what it costs to live in the state. The statewide minimum wage is at least $12 per hour in these states:

Some city governments have also set minimum wages higher than the federal level. For example, employees in New York City earn a minimum of $15 per hour. Some large national employers have also instituted their own companywide minimum wages.

Cost of living vs. minimum wage

Minimum wage and cost of living often seem like they refer to the same concept, and some people mistakenly use them interchangeably. However, the two concepts are distinct.

Determining minimum wage requires much more complex calculations and considerations. Unlike cost of living, minimum wage must consider more than employees needs alone. For example, minimum wage must factor in the amount workers need to live reasonably, the amount businesses can afford to pay and the general effect on the economy.

Until 1968, minimum wage increased at approximately the same pace as national productivity levels, according to the Economic Policy Institute. After that, productivity continued to increase at a steady rate. However, when factoring in inflation, minimum wage has actually decreased by more than $2 per hour since 1968.

Minimum wage vs. cost of living increase

Adopting a nationwide living wage has the potential to be complicated. The cost of living varies significantly across the country, so no single living wage would apply universally.

Nevertheless, various groups have lobbied for or against cost of living vs minimum wage increase. Some of the most notable minimum wage versus cost of living arguments include:

Whether youre searching for a new role or seeking a promotion, its important to understand the difference between the two concepts so you can ensure you receive adequate pay.

FAQ

Is a living wage a better measure of minimum wage?

A minimum wage is the lowest amount a worker can be paid hourly determined by law. Paying an individual below the minimum wage is illegal. A living wage is the amount an individual or family would need to make to avoid living in poverty. This amount is usually higher than the minimum wage and is not mandated by law.

Does minimum wage affect cost of living?

In addition, a Stanford University economist studied the distribution of price hike impacts by income level, and found that while “minimum wage workers live in families across the income distribution,” increasing the minimum wage drives the largest price increases for the poorest 20% of families.

Is living wage and cost of living the same?

The cost of living is often used to compare how expensive it is to live in one city versus another. The cost of living is tied to wages. If expenses are higher in a city, such as New York, for example, salary levels must be higher so that people can afford to live in that city.

What is a realistic livable wage?

California. California’s living wage is $19.41, or $40,371 a year for an individual. A family of four requires $27.42, or $101,378 a year. Childcare costs will cost a family with two working adults $22,259 a year, slightly more than the $24,682 they can expect to spend on housing.

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