Living Wage

Updated on January 29, 2024
Article byTim Worstall
Reviewed byDheeraj Vaidya, CFA, FRM

Definition of Living Wage

The Living Wage is the money that a worker must earn to meet their basic needs by society’s standards. The living wage is not the same as a minimum wage which is the lowest income that the law guarantees to lead a life out of poverty.

The living wage varies by the GDPGDPGDP or Gross Domestic Product refers to the monetary measurement of the overall market value of the final output produced within a country over a period.read more of the economy a person lives in, the general income level, and the opinions of others in that same economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more. It is always relative to a specific economy and does not follow any strict standards globally.

what is Living Wage

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Key Takeaways

  • The living wage is a measure of the income required by a worker to have adequate living standards in a society.
  • It is always specific to a particular economy and time. It is a wage relative to the other wages present in that economy.
  • The wage is calculated by listing all things people should afford in an area and time not to be considered poor and dividing it by the average working hours.
  • The calculation always arrives at something higher than minimum wage. It usually ends at about 60 to 70% of the average wage in that country or economy.

How Does Living Wage work? 

The living wage ensures that a person can enjoy decent living standards in society. The general rule of this wage is that it is a human right that can help the worker afford basic housing, food, education, healthcare, education, childcare, and even savings.

The idea of providing a desirable wage is a voluntary exercise. Employers who want to be reasonable pledge to pay a fair remuneration Remuneration Remuneration refers to overall monetary and non-monetary compensation that employees or independent contractors receive for providing services to an organization or company.read more to their employees in a particular economy. There is no enforcement mechanism other than just the publicity surrounding the pledge.

An employer needs to earn the goodwill Goodwill In accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more of their prospective customers and employees. Therefore, allocating a good wage for their workers is a way for the employer to enrich their positive reputation.

One can explore this idea with Adam Smith’s linen shirt example. In 1776, he pointed out that not affording a linen shirt does not make one poor. However, if they live in a society where the inability to afford a linen shirt implies poverty, they are poor. Hence, this wage helps a person afford things in a society, which will make them poor if they can’t.

It could be an idea like children should have at least two pairs of shoes, a couple should be able to afford to eat out or get drinks once a month, etc.

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How to Calculate Living Wage?

Calculating the living wage is easy enough after sitting the things one needs to afford in a society. Divide the amount necessary to buy those things by the average working hours in a week. The amount per hour is the personal income Personal Income Personal income refers to the total earnings of the individuals and households of a nation through multiple sources such as salary, wages, business profits, bonus, investment returns, dividends, rental receipts, employer contribution in provident or pension funds, etc.read more that helps a person afford those things.

Calculating the living wage can become a little more complicated when one includes taxes and benefits. However, the calculation does consider the payments that will come from the benefits system. These are not related to varying incomes. So, if there’s a flat allowance per child (e.g., UK child benefit), that part of the income is considered. But if it’s payment dependent upon a low income alone (say, the EITC in the US), it is not considered.

The net amount after all the calculations is the final required wage. However, it is important to note that the wage measures relative and not absolute poverty. This is why the definition differs across societies of different average income levels.

National Living Wage in the US

The living wage unit calculates the National Living Wage in the US at MIT. Currently, this is $16.54 per hour as of 2019. MIT also calculates wages for different states and county areas based on housing prices in different areas. In contrast to the Federal minimum wage of $7.25 an hour and the varied state and local minimum wages across the country(for example, $12 in California, $12 in the Seattle/King County area).

National Living Wage in the UK

The government decided to bring in a new and higher version of the regular minimum income called the “National Living Wage” in the UK. So, the older concept of the living wage has now become the “Real Living Wage.”

The Real Living Wage rate is £9.50 an hour in the UK and £10.85 an hour in London, where property prices, rents, and other costs are rather higher. The Living Wage Foundation calculates this on an annual basis.

The government’s version of the National Living Wage is £8.72 an hour for those over 25 years of age and lower rates for younger people, apprentices, etc.

National Living Wage in New Zealand

In New Zealand, the National Living Wage is $22.75 per hour from 1 September 2021, set by Aotearoa New Zealand. It contrasts to the minimum wage set by the government (legal) of $18.90 per hour.

These are the private sectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more estimations of what people think the required wages should be. Further, if they’re working full time, they should not be poor, and from that, we can calculate back to the wage they should be earning for each hour of work.

Frequently Asked Questions (FAQs)

What is a living wage?

The living age is the minimum amount of income required for a person to afford a decent life by the standards of their society. It should not be confused with a minimum wage which is the income guaranteed by the government for the citizens to meet their basic needs.

What is the living wage in the US?

As per the latest calculations, the National Living Wage in the US is $16.54 per hour. The Living wage unit of MIT does these calculations. MIT also calculates the wages of each state across the US.

Is the living wage going up?

The living wage goes up depending upon the change in time and economy of a specific place. Therefore, the changing societal standards, economic derivatives, changes like occupations, supply and demand of products, family frameworks, lifestyle dynamics, etc., are the factors that decide the rate at these wages need to be adjusted.

This has been a guide to Living Wage and its definition. Here we discuss how it is calculated along with the national living wages of the US, UK, and New Zealand. You can learn more from the following articles –