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Workforce Toolkit: Living Wage Calculators

October 18, 2017
What is a “living wage”?
A living wage is defined as a family’s likely minimum costs for food, childcare, health insurance, housing, transportation, and other basic necessities (e.g., clothing, personal care items, etc.). A living wage calculator combines these minimum costs with approximate income and payroll taxes to determine the minimum employment earnings necessary to meet a family’s basic needs. Similar to other measures of basic needs—such as the federal poverty threshold or minimum wage—it works independently of an individual’s educational background and professional experience. Unlike these other measures, however, a living wage is a market-based concept, accounts for regional differences, and is not legally mandated and enforced by legislation.

Although living wage models are a measure of self-sufficiency, they do not budget for what many Americans consider to be basic necessities. These items can include pre-prepared meals or visits to restaurants, expenses for entertainment, or leisure time for vacations and holidays, financial planning through savings and investment, or for the purchase of capital assets (e.g., provisions for retirement or home purchases).

The living wage is the minimum income standard that, if met, marks the difference between the financial independence of a working family and the need to seek out public assistance to avoid consistent and severe housing and food insecurity. Some people argue that the living wage is more accurately defined as a minimum subsistence wage for persons living in the United States.

How is a living wage calculated?
There are several living wage calculators available online that use similar cost inputs. The example below comes from the Massachusetts Institute of Technology and was chosen because it is user-friendly and includes extensive documentation. It can be accessed here: http://livingwage.mit.edu/pages/about.

Assuming a work-year of 2,080 hours (40 hours per week for 52 weeks) per adult and allowing for twelve different family configurations, a basic needs budget and living wage are calculated as follows:
 
Basic needs budget = Food cost + childcare cost + (insurance premiums + health care costs) + housing cost + transportation cost + other necessities cost

Living wage = Basic needs budget + (basic needs budget*tax rate)
The cost items in the first formula are calculated based on information from various national surveys along with state-level data and regional adjustments. The second formula uses national or state tax rates, while local taxes are already factored into the cost items of the basic needs budget.

To illustrate how a living wage calculation differs regionally as well in comparison to the minimum wage (currently $7.25), consider the example of a family of two adults (one working full-time) with two children. In rural Miller County, the sole earner for this family would require a living wage of $23.63 per hour, whereas the same individual would need to earn an hourly wage of $25.59 in Atlanta. The regional difference between living wages results in required annual incomes (before taxes) of $49,143 in the rural area compared to $53,228 in Georgia’s largest metro. The table below includes other examples to show how the living wage model responds to different household sizes:
 
  Miller County Atlanta - Sandy Springs - Roswell Georgia Statewide
One Adult Living Wage $10.28 $11.99 $11.35
Required Annual Pre‑Tax Income $21,385 $24,930 $23,615
Two Adults (one working) Living Wage $16.65 $18.70 $18.04
Required Annual Pre‑Tax Income $34,631 $38,888 $37,522
Two Adults (one working) with two Children Living Wage $23.63 $25.59 $24.96
Required Annual Pre‑Tax Income $49,143 $53,228 $51,917
  Minimum Wage $7.25 $7.25 $7.25

How can a living wage calculator help your city?
Use of a living wage calculator allows cities to understand the basic financial needs of different family configurations in their community.

Used in combination with other methods of determining pay, a living wage may help cities recruit and retain employees. Costs of living have grown faster than long-term wage rates long before the Great Recession, leading to a shrinking middle class. If a city wants to attract a municipal workforce that can contribute to the community’s economy, a living wage sends a signal to that effect.

Cities also compete with the private sector for employees. Advertising the adoption of a living wage reflects an understanding of the connections between compensation, productivity, and loyalty and may convince potential employees that a city can provide not just gainful employment, but possibly a long-term career. In short, using a living wage as a baseline for municipal pay could demonstrate a city’s commitment to its role as a model employer.

For questions about this article, please contact Holger Loewendorf, GMA Research Analyst, at hloewendorf@gmanet.com or (678) 686-6246. 
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