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Recently there has been a lot of news around increasing the federal minimum wage, which has stood at $7.25/hour since 2009. With those conversations there is sometimes another important term brought up: living wage. They may sound similar, but there are key differences between the minimum wage and living wage that are important to understand when thinking about wages in America.

Minimum Wage Defined

The minimum wage is just what it sounds like, a minimum hourly wage that must be paid to employees in the U.S. Minimum wage was created in 1938 under the Fair Labor Standards Act. Currently, a single person making minimum wage and supporting only themselves would hover just above the poverty line. Somebody making minimum wage and supporting anybody else would fall below the poverty line. 

Federal poverty thresholds are tied to the cost of food, but not anything else. So while they have gone up over the years as the cost of food has risen, they haven’t taken into consideration the rising cost of healthcare, rent, or any other basic necessity. That is a limitation of the current method for determining the federal minimum wage.

How much is the minimum wage?

The federal minimum wage is $7.25/hour, but many states and cities have higher minimum wages. For example, the minimum wage in New York City is $15/hour and in Seattle it is $16.69/hour.

The reason many areas have a higher minimum wage is the extremely varied cost of living across the country. Rent and daily expenses can be much higher in a metropolitan area than in a rural area. That is one of the major criticisms of the current minimum wage calculation. 

Living Wage Defined

The living wage is a wage at which a worker could meet their basic needs. The idea of a living wage has been around for the past few decades. While researchers at MIT didn’t create the idea of a living wage, they did create a specific way to measure it. Their living wage calculator is a great way to understand the living wage in your area. The calculator takes into account local costs of food, childcare, healthcare, housing, and transportation to come up with the living wage for a specific area.

How much is the living wage?

The key thing to know about the living wage is that it varies by location. For example, in the New York metropolitan area, the living wage for one adult with no dependents is $16.44/hour — slightly higher than the $15/hour minimum wage in New York City, and substantially higher than the $11/hour minimum wage in New Jersey. In Nashville, the living wage for one adult with no dependents is $12.21/hour, much higher than the $7.25/hour minimum wage, but lower than the New York living wage. That is likely because of the lower cost of housing and food costs in Tennessee vs. New York.

The living wage also changes based on the number of dependents you have, increasing with each additional dependent. This makes the living wage more dynamic than the traditional minimum wage.

Wages and Independent Contractors

An important thing to remember when thinking about the minimum wage is that it only applies to employees. There is no minimum wage for independent contractors. And the American workforce is increasingly made up of independent contractors. In fact, Forbes reports that “44 million workers—or 28.2%—were self-employed at some point during a given week in 2019. 14% of workers said being an independent contractor was their primary job.” 

Increasing the minimum wage wouldn’t necessarily impact these workers, and there are a lot of them. That’s why it is important for businesses to be aware of the cost of living in their area and the living wage. This can be a guidepost for paying fair wages not just to employees, but offering fair wages to contractors as well. To support efforts to pay fair wages, Wonolo doesn’t allow companies to post jobs that pay below the minimum wage.

Deciding what to pay your workers

If you are a business looking to hire employees or independent contractors, you have the opportunity to choose to pay a fair wage. Even if you are not required to do so in your area, it is important to consider paying a living wage as you think about what to pay your workers. Paying a living wage makes business sense: it can help you attract and retain talent, which would in turn lower your costs and boost productivity. Research consistently shows that paying workers a living wage helps attract higher quality workers and increases the productivity of existing workers. Plus, paying a living wage is a way to show your workers you care about their ability to get by.

This piece is one of a series of blog posts aimed at providing general information to the public. To learn more about Wonolo’s mission of helping underserved people find work on their own terms, with jobs that fit their schedule, visit https://www.wonolo.com/. Nothing in this post should be construed as legal advice, if you need legal advice, consult an attorney.

*Living wage and minimum wage are subject to change, these were the wages as of December 2020.