Are You Paying a Living Wage?

What is a living wage?

The International Labour Organization (ILO) defines a living wage as “the wage level necessary to afford a decent standard of living for workers and their families, taking into account country circumstances and calculated for work performed during normal hours.” This definition emphasizes that living wages should cover the costs of all essentials, such as food, health, education, housing and other necessary goods and services. 

“When you’re setting something like the federal minimum wage, you want to consider the averages,” said Holly Sklar, CEO of Business for a Fair Minimum Wage, an advocacy group that supports gradually raising the floor. “When talking federally, it’s a floor that’s adequate for the country as a whole. When you’re talking about an individual or city or a state, you look closer to home to determine what is a living wage.”

How do you determine your region’s living wage?

The Massachusetts Institute of Technology (MIT) developed a living wage calculator that covers every county in every U.S. state. It covers geographically-specific costs for food, childcare, healthcare, housing, transportation and other basic needs at county, metro, and state levels.

The MIT calculator shows the living wage for households of varying sizes as well as the local poverty and minimum wages. In 2025, the living wage for New York state as a whole, for example, was $27.57 per hour before taxes for a single adult with no children. For a family of four with two working adults and two children, it was $33.29.

Living wage vs. minimum wage

A minimum wage is the legally required amount a business must pay its employees in a particular jurisdiction, whereas a living wage is tied to the costs of basic necessities rather than legal mandates.

A city or state’s minimum wage is usually lower than the legally-required minimum wage. For example, in California the current state minimum wage is $16.50 per hour, which does not meet the standards for a living wage for a household of any size.

The living wage in the state is $28.72 per hour for a single adult with no children. A household with two working adults and two children would need a living wage of $34.55 per hour. 

What is the current minimum wage landscape in the U.S.?

The federal minimum wage is $7.25 per hour. States and localities also have their own wage legislation, sometimes mandating more than the federal standard. Washington, D.C., has the highest rate at $17.50, followed by Washington state at $16.66 per hour, and California and New York City at $16.50 per hour.

Meanwhile, some states maintain no minimum wage, including Alabama, Mississippi and Louisiana. In these places, the federal minimum wage applies.

Small business attitudes toward minimum wage increases reveal interesting insights: CNBC and SurveyMonkey data show that 61 percent of small business owners support raising minimum wage despite 50 percent believing it could make it difficult to afford workers. This suggests that many business owners recognize the broader economic benefits of higher wages even when concerned about immediate costs.

Arguments for and against paying a living wage

Once the legally required minimum wage has been met, businesses can choose to set compensation at any rate they’d like.

In general, there are two primary schools of thought:

1. Let the market set compensation levels.
2. Strive to offer a living wage.

1. Let the market set compensation levels.

Some experts believe wages and employee compensation packages are purely a consideration of supply, demand and profitability.

“It is reasonable to assume that most employers, particularly small businesses, want to pay their employers a fair and sufficient living wage. However, with or without this motivation, this becomes a function of basic economics,” said Rob Drury, executive director of the Association of Christian Financial Advisors. “To attract, maintain and motivate quality employees, a business must compensate appropriately — and I use the term ‘appropriately’ rather than ‘fairly’ to emphasize that the living wage figure eventually comes down to a natural market equilibrium of supply and demand, rather than a subjective evaluation of ‘fairness.'”

In other words, the market will set the appropriate level of compensation. Pay too little and you won’t be able to attract the right talent. Pay too much and you could find yourself hemorrhaging money.

2. Offer a living wage to benefit businesses and the economy.

Sklar and her organization believe offering a living wage (and indeed raising the mandated minimum wage) will yield the most positive outcomes for individual businesses and the economy at large. Sklar thinks that customer service tends to be significantly better when wages are higher, resulting in a happier, more loyal customer base.

“We know that frontline employees often make the difference between repeat customers and lost business,” she said.

Sklar also points to the long-term benefits of paying employees more, which she said might result in lower growth quarter-over-quarter but would be more effective in retaining employees, boosting morale and increasing long-term productivity.

“One of the things our business members stress is looking at the whole picture,” Sklar said. “Low pay often means high turnover … And with a reduced turnover [due to higher pay], businesses often see substantial savings in recruiting and training costs. 

“There are also savings from managers able to spend time on more productive tasks, as well as less product waste through lower error and accident rates,” she added.

The business case for living wages

Research from the Living Wage Foundation provides compelling evidence for the business benefits of paying living wages. Their study found that 93 percent of companies paying a living wage experience business benefits, with 87 percent reporting improved reputation and 75 percent reporting increased motivation and retention. These findings demonstrate tangible returns on living wage investments.

The cost of employee turnover further supports the living wage argument. Research shows per-worker turnover costs for $8 per hour employees range from $3,500 to $8,000 depending on industry. A study of the San Francisco Airport found that turnover dropped from 95 percent to 19 percent after wages increased from $6.45 to $10 per hour, generating significant cost savings for employers.

Should you offer a living wage?

Businesses may benefit from offering a living wage in the following ways:

• Attracting and retaining talent: Businesses that offer a living wage tend to attract and retain skilled and motivated employees who are loyal and reliable. This makes for a stable and productive working environment.
• Enhancing reputation and brand: Companies that pay a living wage are likely to take their broader corporate social responsibility seriously. This is good for reputation, both with employees and more widely. [Related article: Can You Make a Profit and Be Socially Responsible?]
• Boosting productivity and morale: When employees feel that they are being paid fairly they feel valued. If morale is high they are more likely to be engaged and productive. [Related article: How Hiring a Chief Happiness Officer Can Save Your Business]
• Reducing social inequality: If a company pays a living wage then it contributes to the economic well-being of the broader community. This is an end in itself but also potentially creates a stronger customer base for the company.
• Meeting regulatory and compliance conditions: In some areas, there are regulatory or other incentives when a company pays a living wage. Complying with regulations avoids the risk of fines or reputational damage.

However, there are times where it might not be feasible to offer a living wage, including:

• Resourcing issues: Companies with tight budgets and thin profit margins will find it harder to pay a living wage. In industries where there are thin profit margins, higher wages could lead to unsustainable operating costs.
• Competitive disadvantage: If similar companies are not paying a living wage then a company can place extra strain on its costs and profitability by doing so.
• Experiencing tough economic conditions: If the company is in the middle of a downturn, then it might need to reduce its overhead, including labor costs. In volatile times, a company might also need to prioritize financial flexibility over higher wages.
• Having scalability issues: Companies that are trying to scale often need to inject capital into the business, rather than spending it on wages. Those expanding across several geographies might struggle to maintain a common living wage when costs vary from area to area.

What are alternatives to offering a living wage?

You can do many things to improve employee compensation without raising wages. If you can’t reasonably afford a large-scale pay raise without overburdening margins, Drury suggested leveraging employee benefits packages to boost employee compensation for a lighter expense.

“Total compensation is an important principle, as most employees will look at how the whole package rewards them,” Drury said. “Benefits packages can provide effectively greater compensation at a lower cost.”

Here are a few of the benefits and perks you could offer employees instead of (or in addition to) offering a living wage:

• Traditional benefits packages: Employees are often on the lookout for comprehensive benefits packages, including medical, dental and vision insurance and life insurance, disability insurance or pet insurance. Retirement plans, like small business 401(k) plans, also fall into this category. Offering some of these options can make your total compensation package even more attractive.
• Paid leave policies: Paid leave policies offer employees paid days off for vacation time, sick days or family care. Some forms of leave, such as family leave, are even supported by the employee and the taxpayer, representing a benefit you can offer without any added expense.
• Telecommuting policies: Remote work plans are a cost-effective perk to offer employees if the nature of your business allows it. Granting workers a few days to work from home each week ― or allowing them to work fully remote ― is a desirable and flexible arrangement for workers that can also save employers money on physical space.
• Professional employer organizations (PEOs): PEOs are an excellent way to offer your employees benefits and human resources solutions at a lower cost than providing them on an individual, company-to-company basis. PEOs pool the resources of many businesses within their network, creating an economy of scale and lowering members’ rates.

If you stick with the state or federally-mandated minimum wage levels instead of offering a living wage, you’ll comply with the law and ensure lower payroll expenses. However, not offering a living wage may adversely affect employee performance. You may also see increased turnover in positions that pay only minimum wage.

Consider a cost-benefit analysis comparing the productivity losses and costs of training new employees versus paying a living wage. In many cases, paying a living wage is more cost-effective.

Invest in your employees

While every business must manage costs and remain profitable, a happy worker is a productive worker and a productive company is a healthy one. Whether it means offering a living wage or adjusting compensation to ensure employee happiness and boost labor market competitiveness, sometimes it’s a worthwhile investment to pay a bit more to your employees upfront.

Mark Fairlie and Kimberlee Leonard contributed to this article. Source interviews were conducted for a previous version of this article.