For years, the standard practice for establishing pay rate has been a large-scale, qualitative process based on “competitive pay” (comparative to other equivalent corporations), “fair pay” (again, based on market competition and local expectation), and the even more nebulous “good pay.” But recently, more and more organizations are recognizing the concept of “living wage”—that is, what it actually takes someone in their locality to sustain healthily.

At their most comprehensive, living wage calculations try to determine the wage rates necessary for maintaining households of various sizes—all the way from a single employed adult, to a two-adult household, one income, with two children to support. Corporations who employ the living wage method of salary planning are finding that it both attracts and retains quality employees, reduces turnover, and produces better business results overall.

Living Wage vs. Minimum Wage

Minimum Wage

Minimum wage is a federal and state regulated pay limit that was established in 1938 (at $.25) under the Fair Labor Standards Act. Federally, the rate is currently $7.25, and if a state offers a higher minimum, that rate must be met. The latest increase in minimum wage was enacted in 2009. Aside from the state-level regulations, no other locality or contextual considerations are taken into account to establish this rate.

According to the Economic Policy Institute, when adjusted for inflation, the federal minimum wage currently sits at the lowest buying power since 1956. For perspective, the Health and Human Services agency calculated poverty-level pay at $6.80 per hour.

Living Wage

Living wage, on the other hand, takes into account factors like local housing prices, food costs, health care, and transportation. It can fluctuate with inflation and other economic changes. It is a more complicated calculation, and there is currently no single, authoritative living wage calculator. Both the Economic Policy Institute and MIT offer living wage calculators that are widely accepted as standard across industries.

What are the results of implementing living wage vs. minimum wage? Multiple studies in Baltimore, Boston, Los Angeles, and San Francisco show positive impact, with firms diminishing their turnover rates, sometimes dramatically. Home healthcare workers in San Francisco decreased turnover by 57%, and the San Francisco Airport found that turnover of security screeners dropped from 95% to 19%.

On a municipal level, studies across the years have indicated that living wage ordinances do not put undue strain on city or county budgets, and have no adverse financial impact on the city.

In terms of impact on workers, a study performed by the National Bureau of Economic Research confirmed that the implementation of living wages both boosts the pay of lowest-wage workers and reduces the poverty level in the urban areas they’re enacted.

Establishing Living Wage Rates

As mentioned above, there’s no one definitive living wage calculator for corporations or cities to refer to. However, there are established contextual and environmental factors they can consider. The main point of focus is understanding their particular regional employment market and cost of living. Knowledge of job availability and the realistic price to put food on plates, travel to and from work, and pay utilities is key to knowing what to provide hourly to ensure that can happen.

In order to do this, companies must be forward-thinking enough to break free from the job-board database method of wage planning. This quantitative data doesn’t take into account any of the contextual factors relevant to understanding real cost of living. More and more, those salaries based on job board data are leaving high-quality workers dissatisfied and unwilling to apply for those positions.

Instead, companies should turn to specific living wage resources for salary planning. We already mentioned the two industry standards, The Economic Policy and MIT living wage calculators, but increasingly, more and more university campuses are performing research on this issue. Turning to your most-local resource to provide data on a city level can be a valuable source of information for planning a successful living wage policy.

Additional Benefits of Living Wage

Maintaining employees, providing a sustainable lifestyle, and helping develop a sense of dignity among employees may seem like good enough reasons to employ a living wage policy, but there are also additional benefits.

First, companies offering living wages report a higher level of employee morale, lower absenteeism, and higher productivity levels. In addition, there is a notable impact on company reputation within the community. Another community-level benefit is the overall lifting of the local economy, and all the advantages aligned with that shift. The reason there’s a global effort to enact living wages is because, as the saying goes, a rising tide lifts all shifts.

Ensure You’re Getting the Best Results From Your Investments

Minimum wage is no longer the standard for finding and retaining the highest-quality employees. Understand that the investment you make in your workforce will come back to you in production and output, and your bottom line will see a positive impact.

Action Group Staffing understands the delicate balance between wage and quality of staff. Contact us today to ensure you’re making the smartest investment with the strongest return.