Are You Paying a Living Wage?

What is a living wage?

A living wage is an hourly employee pay rate that each working adult in a household requires to meet typical expenses for essential goods like food, medical care, housing and transportation. Living wage values vary depending on the household’s size, the composition of adults and children and location. For example, the living wage will be very different for a Seattle family of four with two working adults and two children than for a single adult living in New York City.

“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?

If a business owner wants to offer a living wage to their employees, there is a handy tool to determine the right number. The Massachusetts Institute of Technology (MIT) developed a living wage calculator that covers every county in every U.S. state. The calculator shows the living wage for households of varying sizes as well as the local poverty and minimum wages. 

The living wage for the United States as a whole in 2023, for example, was $25.02 per hour before taxes for a family of four with two working adults and two children.

Living wage vs. minimum wage

A region’s minimum wage isn’t always equal to its living wage. For example, in Middlesex County, New Jersey, the current state minimum wage of $15.13 per hour does not meet the standards for a living wage for a household of any size. 

The minimum amount for the living wage in the same area is $25.68 for a single adult. A household with two working adults and two children would need a living wage of $31.88. Of course, employers can and often do choose to pay more than the mandated minimum wage, but they are not required to do so.

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. California and New York have a minimum wage of $16 while Washington state’s is $16.28.

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

However, it’s worth noting that the federal minimum wage would have been $22.88 an hour in 2021 if it followed productivity growth since 1968, according to Statista. Today, 30 states plus Washington, D.C., have raised the minimum wage beyond the federal minimum to account for the inflation-driven decline in minimum wage value.

However, the minimum wage doesn’t represent average wages, which have risen over time. For example, the average annual salary for men in 2023 was $63,960, while for women, it was $53,404, according to statistics from the U.S. Bureau of Labor. Assuming a 40-hour work week, this means that men on average earn $30.75 and women $25.68.

The overall value of those wages, however, has remained level since the 1960s. In other words, while the nominal wage has risen for the average American worker, the purchasing power of those wages has remained largely stagnant.

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: 

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

But when should businesses offer a living wage? When is it in a company’s best interest not to?

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.”

Should you offer a living wage?

Businesses have much to gain from offering a living wage. Some of the main benefits are:

• 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. 

When might it not be in a company’s best interest to pay the living wage?

• 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.
• Putting themselves at a 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 pad 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 expenditures. 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.