What does a ‘Living Wage’ really mean?

By Ben Crosby

A blanket term for a diverse population

The term ‘living wage’ is used by many organizations as a guidepost to ensure employees are able to stay above the poverty line and meet basic needs. Unfortunately, it’s a term that often misses the mark when it comes to ensuring staff are compensated at a rate that is in line with fluctuating costs of living. For example, while only 3% of full-time working employees fall below the true poverty line, an astounding 64% of the population lives paycheck to paycheck in the United States. They may not be living in “poverty” as it is defined by the United States Department of Health and Human Services, but their compensation might have them treading too close to the line.

Offering values-based wages

Leaders may believe that offering their state’s minimum wage (or just above it) constitutes a living wage. Or that a living wage is a fixed number that can’t be adjusted or customized for their location and organization. Ultimately, paying employees a living wage is a values-based decision. For organizations to live their values, leaders should consider their organization’s core values, operating goals & strategy, and the balance of increasing employee compensation while maintaining sustainable workloads. Ultimately there is no one “right answer” on the living wage, just the answer that makes the most sense for your organization and goals.

Tips to determine living wage for your organization

Here are some helpful factors that Edgility takes into consideration when helping organizations determine a fair living wage:

• The Federal Poverty Line: While this number isn’t a recommended measuring stick for compensation or living wage, it is helpful to understand what the federal government considers to be the poverty threshold. The Department of Health and Human Services formulates this number to determine eligibility for specific subsidized programs, such as Medicaid.

• MIT Living Wage Calculator: This widely-referenced tool allows organizations to select living wages for a given county based on a specific family configuration (ex., two adults, one working adult and two children, or one working adult and three children, or one working adult, no children). The tool also includes a clear breakdown of local cost assumptions related to rent, transportation, food, and other essential items.

• Average rent costs for any area: Many financial experts advise that a person’s rent should equal no more than ⅓ of monthly income. Keeping this in mind, monthly compensation should be about 3 times the average cost to secure housing in your area. Obviously, the cost of housing is based on the assumptions you make – are you benchmarking average rents for a studio? For a shared apartment? Whatever inputs you land on, we often suggest that employers keep an eye on local housing costs to better understand (and prepare for) market fluctuations.

• Choosing a higher market percentile: Basing their compensation program at the 50th market percentile is a common strategy for many organizations, but we often suggest pushing forward towards the 75th percentile for your lowest-paid or entry-level roles. Doing so will enable your organization to stay on top of market changes, help maintain the satisfaction of current staff, and provide a competitive wage for staff in entry-level or direct service roles.

Increasing the living wage for lowest-paid staff has a compounding effect

When funding living wage initiatives, organizations may believe that they will have to forgo raises or limit salaries for C-suite staff. Whether an organization finds a way to increase the overall budget or rearrange existing funds, the eventual effects can be felt across the organization. However, it isn’t all doom and gloom. For example, allocating a one-dollar hourly increase for staff paid at the lowest tier can have a significant economic and psychological impact, whereas your highest paid staff may barely notice an equivalent increase in their paychecks. Additionally, when taking into account cost-savings associated with higher employee retention, studies have estimated the actual budget cost of implementing a living wage at 1% of the total operating budget.

Other factors to consider when determining living wage

When implementing a living wage, you should consider the gender, racial, age, and other identity configurations of your employees. For example, the needs of independent young people are different from staff who are supporting a multi-generational immigrant household. Additionally, it is essential to define what constitutes a “typical family unit” among your staff. Is it based on being married or having partners? If so, will you assume a dual-income or single-income household? In the spirit of true equity, organizations may need to expand their thinking around what is considered a ‘normal’ household and address common biases.

High wage vs. high workloads

In implementing a living wage, you may need to consider small reductions in your workforce to support affordability. While this may seem like it would automatically increase workloads for the remaining staff, consider the indirect benefits your employees may enjoy. If your living wage leads to increased employee engagement, productivity, and retention, what impact might you see on your organization’s ability to meet its mission? On recruiting, hiring, and training costs? On general operational efficiency, organizational culture, and the quality of work your employees produce? Budget and headcount are certainly critical factors to consider, but make sure that you are looking at things from “all the angles” and thinking about potential long-term impacts on both employee morale and productivity.

Accounting for remote workers

The recent increase in “remote only” workers adds additional complexity to the idea of offering a living wage to staff. In general, we find that most organizations focus their living wage policies on front-line or direct-service workers who are providing services in a specific geographic location. If you are intent on defining a living wage for a remote workforce, you will need to consider the geographic areas in which the majority of your workers reside, the areas in which you hope to hire/recruit new employees, as well as your budget. For example, offering a living wage based on the cost of living (or cost of labor) in NYC may lead to a costly salary structure, especially if the majority of your remote employees live in lower cost-of-living parts of the country. It may also unintentionally motivate employees to move to lower-cost areas of the country, where their dollar goes farther. In general, we recommend choosing a representative region to serve as a reference point for your overall salary structure and living wage assumptions.

Conclusion

In the end, offering a living wage is a values-based decision that organizational leaders make to ensure that their compensation structure is aligned with their values. This is important work that requires careful analysis and discussion; when done right, it is a powerful tool to increase workplace equity for your employees.