The definition of “living wage” is difficult to nail down. In 2012, members of the University of Virginia community issued a living wage demand of $13.00 per hour for University employees, to be adjusted yearly. Amy Glasmeier, the researcher behind the MIT Living Wage Calculator, defines living wage as “just enough to pay bills for the necessities of life and not fall behind”. The Economic Policy Institute built its Family Budget Calculator to determine “the income a family needs in order to attain a secure yet modest living standard,” while the Center for Women’s Welfare Self-Sufficiency Standard calculates “the amount of income necessary to meet basic needs (including taxes) without public assistance…and without private/informal assistance”.
What is a “living wage”?
Though they may appear under different names, each of the above represents an attempt to define an hourly wage or yearly income that will allow households to meet basic needs. The effort to establish a “living wage” is made difficult because security and comfort are both subjectively, and relatively, defined.
In the US and other developed countries, living wage calculations tend to reflect households’ needs for shelter, food, clothing, transportation, health care, and taxes, as well as some small budget for “other”. While there are good sources of consumer data to use, researchers must make some decisions about what constitutes “just enough” or a “secure but modest” lifestyle. Even when setting explicit income minimums, as in the case of the Self-Sufficiency Standard, researchers must begin with certain assumptions.
Further, living wage is the amount an individual must earn to live safely and in comfort, albeit frugally, based on price in a given area. Like the Virginia Poverty Measure, living wage calculations must account for variations in cost of living between even small geographies, such as states or counties. In other words, safe and comfortable accommodations change relative to place.
A quick comparison
Consider the following income benchmarks for a one adult, one child Virginia family in 2013:
- If the adult in this family worked 52 weeks, 40 hours per week, for minimum wage, the family income would have been $15,080. (This would be true anywhere in Virginia, as well as several other states.)
- This same family would have been below the federal poverty threshold if its annual income was less than $15,510. (This would have been true anywhere in the continental US.)
- By the MIT living wage estimate, the annual living wage for this family would have ranged from $36,582 to $50,709, based on locality.
Given the variation among these figures, you may have some questions. Perhaps you are curious about the range, want to know more about the method, or wonder about the figures’ validity. In this post, I will introduce you to the components and some complications of living wage calculations; provide examples of how different assumptions result in different numbers; and discuss whether such calculations are helpful.
Location, location, location
The biggest ticket item in determining what income is necessary for a reasonable, make-ends-at-least-meet, lifestyle–no matter who is calculating–is housing. This is also the item most likely to vary based on geography. Consider the five cities in the plot below, chosen to represent the lowest through highest quintiles of living wage estimates in Virginia, based on the MIT Living Wage Calculator.
According to the MIT measure, which uses 2013 Fair Market Rent data from the Department of Housing and Urban Development, the estimated monthly rent for our one-parent, one-child Virginia family is about $600 in Pittsylvania, and nearly $1,500 in Manassas. Even if we held all other costs constant between the two locations, the rent variation amounts to a nearly $11,000 difference between the estimated living wages in these two communities. With taxes, this difference is even larger.
You can see the full range of the one adult, one child living wage estimates from the MIT measure in the map below. Click on the localities to see the specific estimates.
The overall pattern of estimates—higher in some areas, lower in others— stays consistent when we look at other family compositions, such as a single adult living with two children, or two adults living with a child.
Approaches to measurement
The MIT measure is not the only available way to calculate living wage. Other researchers have tackled the calculations with their own set of assumptions. As a result of differing assumptions and decisions, living wage estimates can vary even for the same location.
Consider a one adult, one child family from King William County in 2013. Under the Economic Policy Institute method, the annual total income estimated for a secure, yet modest, lifestyle nears $57,000, while it amounts to just over $42,000 under the MIT calculation. The Self-Sufficiency Standard does not have 2013 numbers for Virginia, but updating the most recent estimates for inflation reveals a self-sufficiency range from $26,200 to about $33,100.
In each case, the source of the data plays an important role. But equally, or more, important are the assumptions behind the estimates.
For instance, the underlying assumption for MIT appears to be that the one child in question is school-aged, needing before-school, after-school, and summer care, while EPI assumes the cost for full-time care of a 4-year old, accounting for a much higher estimate. The Self-Sufficiency Standard, in acknowledgement of these cost differences, list different budgets according to the child’s age. However, this measure assumes that all adults of working age work full-time, while the MIT measure does not make this assumption, allowing MIT to allot $0 to childcare in a two adult household.
As far as healthcare expenses go, it appears the EPI takes into account the total premium costs for health insurance, as opposed to counting only employee contributions—among other calculation differences. The health care budget, then, is higher in the EPI measure than in either of the others.
Researchers must also decide, for example, whether it is reasonable to assume that families rely on public transportation, what kind of budget is acceptable for food, and how much money to allocate to the “miscellaneous” category. The methodologies of each of the measures illuminate the rationales behind many such assumptions.
How much can we trust the numbers?
This past summer, Ikea announced the decision to link its minimum wages to the 2013 MIT Living Wage calculator, using the cost of living for a one adult household. In Virginia, this would range from $7.73 in Danville, where Ikea has its only US manufacturing plant, to $13.22 in Prince William County, the location of the Virginia Ikea store. This brings up the question: How much trust should we place in these living wage calculators to measure a secure lifestyle?
To the extent that these calculators distinguish between rents near DC versus Danville, they are both helpful and reliable. In other words, an employer who wants workers in Prince William to get the same purchasing power from their paychecks as the ones in Danville will need to pay their Prince William employees more. This employer might benefit from using living wage calculators as cost of living guidelines.
However, the precise amount a worker needs to cover things like medical bills, child care, and groceries is contingent not only on location, but also on the size and needs of her household. And not only do the living wage methods above rely on researchers’ decisions, but also on aggregate data, meaning that there will be scenarios that the calculations cannot cover.
Furthermore, the total value of a set of goods (housing + childcare + transportation, for example) may be better understood as a package, rather than the sum of its parts. Consider, for example, the trade-off between accessible versus affordable areas to live and the resulting transportation/rent prices, or choices about child care that require balancing quality and cost. The individual data points on rent, child care, or transportation can be enlightening and important to study and compare, but a combined summary has some limitations.
Finally, the line between preference and need can sometimes be difficult to find. For example, individuals may choose to live in a given neighborhood, despite slightly higher rent prices, because of the community network that contributes meaningfully to a sense of security. Such decisions, economic though they may appear, have more complex valuations than these calculators permit.
Compare these living wage calculators to an even lower-tech measuring tool: rulers. The markings on these rulers may not accurately measure the width of a picture frame. However, they can show that one frame is wider than another—and can thereby be used to give us some information, however incomplete, about the picture inside.