Here's the difference between a 'minimum wage' and 'living wage,' and why it matters

Near-historic inflation has drawn attention to the cost of affording the basics.

ByMax Zahn ABCNews logo
Tuesday, January 10, 2023
These are the states raising the minimum wage in 2023
Workers earning minimum wage in more than two dozen states can expect a raise in 2023.

Near-historic price increases for basics like food and gas have drawn scrutiny to a question at the heart of the economy: How much money must a worker make to stay afloat?

The price of eggs has risen nearly 50% over the last year; while the cost of milk and bread have each jumped about 15%. Even after falling from a summer peak, gas prices remain 10% higher than a year ago.

While price increases have slowed in recent months, they continue to hover near a 40-year high.

For some, a pay hike has softened the blow. Nearly half of U.S. states raised their minimum wages at the outset of 2023. Meanwhile, some major companies have recently upped their entry-level pay. Target, for instance, hiked its base wage to $24 an hour last year.

As cost increases persist and workers try to keep up, buzzwords like "poverty wage," "minimum wage" and "living wage" are coming back into the lexicon, shaping conversations about what it means to make enough and who decides where to draw the line.

But the definitions and implications of these terms can get overlooked, muddying a centuries-old issue that affects workers and employees alike.

"Ultimately, this boils down to a philosophical question of what the bare necessities really are," Steve Allen, an economist at North Carolina State University's Poole College of Management, told ABC News.

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Here are the differences between a poverty wage, a minimum wage and a living wage; and why they matter:

Poverty wage

A poverty wage is a level of pay that would put a full-time worker below the U.S. poverty line, an income threshold set by the federal government each year.

The government began to measure the threshold in the mid-1960s, soon after then-President Lyndon Johnson declared a "war on poverty." Mollie Orshanksy, an employee at the Social Security Administration, developed the measure by multiplying the cost of food by three, since at the time many economists believed that food costs should make up a third of a household's budget.

"Lyndon Johnson needed a way to demonstrate what people needed to live on," Amy Glasmeier, a professor of economic geography at the Massachusetts Institute of Technology and the creator of a living wage calculator, told ABC News.

The method of calculating the poverty line has remained the same over the ensuing decades, but officials have updated the measure each year to adjust it for inflation. The poverty line is a uniform measure for all 48 states in the continental U.S. and Washington D.C., but the federal government has developed separate measures for Hawaii and Alaska.

Many economists regard the poverty line as antiquated since it extrapolates overall financial circumstances from a single category of costs and remains uniform regardless of cost-of-living differences between regions, Glasmeier said.

"National data puts New York together with Tupelo, Mississippi," she said. "That's about the difference between Mars and America."

The poverty line is used to determine whether people qualify for a host of federal benefit programs, including the Supplemental Nutrition Assistance Program, or SNAP, which is commonly referred to as food stamps; as well as assistance for school lunch.

Last year, the poverty line for a one-person household was $13,900, which when spread over the number of hours a full-time employee works in a given year, comes out to about $6.80 per hour.

Health and Human Services, a federal agency, will release the 2023 poverty line later this month.

Minimum wage

The minimum wage is the lowest legal pay rate that a company can offer its employees. Crucially, the minimum wage does not derive from a calculation of the subsistence level for a given region or household size, but rather is set by elected officials within a federal, state or local government.

"When employers are saying, 'How much do I have to pay?'" Glasmeier said. "That's the minimum wage."

The U.S. set its first federal minimum wage at $0.25 in 1938, amid the depression, when jobs were scarce and workers lacked leverage.

The federal minimum wage, which was last raised in 2009, stands at $7.25 an hour. When adjusted for inflation, the federal minimum wage last summer reached its lowest level since 1956, the left-leaning Economic Policy Institute found.

Thirty states have raised their minimum wage above the pay rate guaranteed by the federal government, including 23 states that imposed a price hike at the start of this year. Washington is the state with the highest minimum wage, offering workers $15.74 per hour.

In addition, 27 cities and counties raised their minimum wage at the outset of this year, stretching from San Diego, California, to Portland, Maine. The city with the highest minimum wage, SeaTac, Washington, raised its base pay to $19.06.

The nationwide push for minimum wage hikes intensified a decade ago, when fast food workers launched a campaign, called Fight for $15, aiming to raise wages and unionize the fast food sector.

Living wage

A living wage is a pay rate that would allow a given worker or household to afford its basic needs, such as housing, food, health care and transportation.

Unlike the poverty line, which extrapolates a national baseline subsistence based on food costs, a living wage typically derives from a more complicated calculation that takes into account additional expenses as well as cost-of-living differences across regions.

A living wage usually exceeds the poverty wage, since it takes a more expansive view of household expenses, including the need for savings in the event of a financial emergency, Allen said.

"It takes into account a broader set of expenditures that they feel are the bare necessities," he said. "It includes enough that the household can be in a position to save something."

There is no single, authoritative living wage measure. A popular example is the Living Wage Calculator at Massachusetts Institute of Technology, which Glasmeier created.

The calculator first asks users to input their location, such as a city or metro area, allowing the metric to incorporate specific regional costs. The metric also offers multiple figures that correlate with the number of adults and children within a given household.

In New York City, for instance, the living wage for a household with one adult and no children stands at about $22.70. In Montana, a living wage for the same household stands at about $16.30.

Living-wage metrics help Americans understand how much money it takes to afford basic necessities, Glasmeier said.

"As a nation, we're only as good as the conditions of our people," Glasmeier said. "This information should be a reflection of what is needed, because otherwise it's arbitrary - and there are always losers."