Minimum Wage vs. Living Wage

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One of the items that has been getting a lot of play since President Obama's State of the Union Address has been minimum wage. In his address, the President suggested that the federal minimum wage be raised from $7.25 an hour to $9.00 an hour, indexed to inflation. (I'm old enough to remember being excited when the minimum wage went from $4.75 to $5.15.)

But what is the minimum wage? Could you really live off the minimum wage? Or is a living wage something different?

Federal Minimum Wage

The Federal Minimum Wage was enacted under the Fair Labor Standards Act, setting the first minimum wage at $0.25 an hour. Since then, various amendements have been made to the act, and the minimum wage has risen as politicians see fit to require a minimum standard of earnings for workers.

States and localities can set their own laws, based on cost of living, although some states don't have minimum wage laws in place at all, simply allowing the federal law to suffice. Right now, there are states that require workers be paid more than $9.00.

In some cases, though, there are cities that require employers to pay a “living wage.”

What is a Living Wage?

Even though there is a minimum wage set at the federal level, the reality is that, for many, the minimum wage doesn't make it easy to cover the necessities of life. If you assume that someone works 2,000 hours a year, the minimum wage results in a total of $14,500. That's not enough to pay my housing expenses (mortgage, property taxes, insurance, maintenance) for the year.

In fact, earning minimum wage is not enough to put a family above the poverty line. Only a single person is above the federal measure of poverty when earning minimum wage. The thought is that paying a living wage (whatever that amounts to for a specific location) will help lift people out of poverty.

Help for Minimum Wage Workers

While it is practically impossible for a family to even fulfill basic needs on a minimum wage job, the fact is that there are other helps available to minimum wage workers. Food stamps, Medicaid (although the requirements can be quite restrictive), and the Earned Income Credit all help relieve some of the difficulties that come when someone is paid a minimum wage, rather than a living wage.

What Happens with a Rise in Minimum Wage?

Of course, there are concerns with raising the minimum wage. One of the issues is the impact on small business. Big companies can usually absorb an increase in minimum wage. However, small businesses have a harder time. It would be especially difficult with the 24% jump represented by an increase to $9.00 an hour — especially in this economy.

Another concern that has been expressed is that there is an increase in youth unemployment when the minimum wage is increased. After all, if businesses have to pay a higher wage, many of them also want more experience to go with it. They want to feel as though they are getting more value for their entry-level dollar. Young people find it harder to get jobs when the minimum wage heads higher.

Finally, indexing the minimum wage to inflation might cause more problems than it solves. If wages go up, the thought is that prices are likely to rise at some point to reflect that increase. If the minimum wage is indexed to inflation, there is a very real chance of exacerbating this problem.

On the other hand, it has been a long time since general wage growth for the middle class has kept pace with inflation. But boosting the minimum wage is unlikely to make a big difference for those who already make more than minimum wage, but have not seen their pay keep up with prices.

What do you think about raising the minimum wage? Do you think it's a good idea? Do you think that workers should earn a living wage?

Miranda Marquit

Miranda is a journalistically trained freelance writer and professional blogger specializing in personal finance. Her work has appeared and been mentioned, in various media, online and off. You can follow Miranda on: Twitter

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7 Comments

  1. In a perfect world, every working person would earn a living wage. It would be nice if that would happen, but it seems that there will always be people earning much less than they can comfortably live off of.

    1. Childless adults working full time at minimum wage DO qualify for EITC. The credit is minimal at $475 versus qualifying with one child at $3169. You could make the argument that the EITC encourages low wage earners to have children, but you can’t say they don’t qualify. Source: IRS.gov )

  2. I don’t think a $9 minimum wage is going to have a big impact one way or the other. Most people earning minimum wage are not trying to feed a family off it – they’re kids, trainees living at home, etc.

    And of course a “living wage” is relative – plenty of illegal immigrants live on less than minimum wage, and they don’t seem to be dying in droves. Many even manage to send money home. THis suggests that the current minimum wage is actually above living wage. You may not live like you’d want, but it is possible to stay alive.

    1. Source, please. Where did you get the idea that most people earning minimum wage are kids, trainees living at home, etc? Just about half of them are over 25, which means they’re not kids.

      1. I believe Wayne is referring to this:
        from Cornell Economics Professor Richard Burkhauser:
        “A beneficiary from a proposed federal minimum wage hike to $7.25 an hour is far more likely to be in a family earning more than three times the poverty line than in a poor family. In total, only 12.7 percent of the benefits from a federal minimum wage increase to $7.25 an hour would go to poor families. In contrast, 63 percent of benefits would go to families earning more than twice the poverty line and 42 percent would go to families earning more than three times the poverty line.”

  3. You did a nice job of presenting the facts without bashing one side or the other.

    I think that anyone who is in favor of raising the minimum wage should be required to take Econ 101. As prices rise (in this case wages), demand will fall (in this case employment). It’s common sense. If I value my time at $7.25/hour, I don’t understand why the government won’t allow me to do so. Yes, $9 is better than $7.25, but $7.25 is better than 0.

    If you’re truly wanting to reduce poverty, the EITC has proven to be far more effective.

    Raising the minimum wage sounds like a great thing. But if more is better, why not set the minimum at $20 or $50. Clearly, supporters recognize this as a bad idea, but somehow a 24% increase does affects nothing?

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