Early in his term, President Joe Biden announced his support for an idea lawmakers on the left had been pushing for years: increasing the federal minimum wage to $15 per hour. Proponents assert the current hourly rate of $7.25 is simply too little to maintain a decent standard of living. To stress this point, several politicians and other public figures took part in the Live the Wage Challenge in 2014, living on minimum wage for one week to show how difficult it is.
Many state and local governments have already passed their own minimum wage increases. The Economic Policy Institute (EPI) reports that more than half of all states in the United States have minimum wages above the federal minimum, and 45 cities and towns have adopted wages higher than the minimum level for their state. But lawmakers in other states have pushed back, claiming higher minimum wage laws will hurt business owners and limit job growth. According to the EPI, 26 states have already passed “preemption laws” to bar municipalities from raising their local minimum wage levels above the state level.
At the heart of this debate is the question of what really amounts to a living wage. In the words of the Fight for $15 campaign, the question is how much America’s workers need to “feed our families, pay our bills, or even keep a roof over our heads.” And as it turns out, that’s not at all a simple question to answer.
In announcing his support for the minimum wage hike, Biden declared, “If you work for less than $15 an hour and work 40 hours a week, you’re living in poverty.” However, according to FactCheck.org, this isn’t quite true. Even the current federal minimum wage is technically enough to keep a full-time worker with no dependents over the federal poverty line.
But it’s not clear how much that statistic matters. For one thing, many low-wage workers do have dependents, and the cost of supporting them pushes them below the poverty level. That explains why a 2021 Congressional Budget Office report found that the proposed wage hike would lift roughly 900,000 Americans out of poverty by 2025.
Yet even this number may be an understatement. There are many problems with how the government defines poverty — so many that even the government itself doesn’t always rely on it. In other words, someone who falls above the government’s official poverty line isn’t necessarily making a living wage.
Minimum Wage & the Poverty Guideline
Technically, the federal government has more than one way of defining poverty. When people talk about the “poverty line,” they’re usually referring to the poverty guidelines set by the Department of Health and Human Services (HHS). There are actually three separate guidelines: one for the contiguous U.S. and higher ones for both Alaska and Hawaii, where the cost of living is higher.
As of 2021, the poverty guideline for most of the country is $12,880 for a single person. A person earning $7.25 per hour working 40 hours per week would bring home $15,080 per year before taxes — assuming they took no vacation or sick days. Therefore, this single person would indeed be making enough to be slightly above the poverty guideline in most states.
However, the picture changes for people raising children on minimum wage. According to the National Employment Law Project, roughly 1 in 4 workers with minimum-wage jobs have kids to support. The poverty guideline for a family of three is $21,960, so a single parent trying to raise two kids on that same $15,080 per year would be well below it.
Problems With the Poverty Guideline
Even if you assume anyone whose income falls below the poverty guideline is “poor,” and anyone above it is getting along just fine, not all minimum-wage workers are over the line. However, it’s not clear whether that’s even a reasonable way to define poverty. The poverty guidelines are based on the official poverty threshold from the Census Bureau, and the formula used to calculate this threshold is pretty archaic.
The poverty threshold was first developed in the mid-1960s by Mollie Orshansky, a Social Security Administration worker. At the time, the government didn’t have the accurate figures it has today to show how much the average household spends on the things they need to live, such as food, housing, and health care. The only expense Orshansky could calculate with any accuracy was food costs, based on food plans developed by the U.S. Department of Agriculture.
Orshansky found a 1955 USDA survey that showed the average American family spent one-third of its after-tax income on food. Based on that, she estimated the smallest amount a family could live on would be three times the amount they needed to feed themselves on the most frugal diet possible. Today, the Census Bureau continues to calculate the poverty threshold by taking the cost Orshansky worked out for a “minimum food diet” in 1963, adjusting for inflation, and then multiplying it by three.
The problem is that a lot has changed since 1955. A 2019 survey from the Bureau of Labor Statistics (BLS) shows that the average American family now spends less than 10% of its pretax income on food. Its biggest expense is housing, which accounts for 25% of income. Transportation and health care also take up a sizable chunk of the budget.
The Census Bureau admits that the poverty threshold isn’t the best measure of whether someone’s income is enough to meet their needs. It stresses the threshold is only “a statistical yardstick,” not “a complete description of what people and families need to live.” So even according to the government, being over the “line of poverty” is no guarantee someone actually has enough money to cover their basic needs, let alone extras like a movie or haircut. That’s the point politicians were trying to highlight through the Live the Wage challenge when they tried — and for the most part failed — to survive on minimum wage for a week.
The Supplemental Poverty Measure
In 2011, the Census Bureau designed a new way of calculating how many Americans live in poverty, known as the supplemental poverty measure (SPM). It’s a lot harder to calculate than the official poverty threshold, but it offers a clearer picture of how much someone really needs to get by.
Both the official poverty threshold and the SPM define people as poor if “the resources they share with others in the household are not enough to meet basic needs.” However, the SPM differs in several ways from the official measure:
- It Counts More People per Household. For purposes of resource sharing, the current poverty measure assumes a “household” is all the people who live under the same roof and are related by birth, marriage, or adoption. The SPM uses a broader definition: It counts foster children, unmarried partners and their children, and any other children who live with the family. This definition recognizes that two adults bringing up five children have just as many mouths to feed, even if they aren’t all related to each other.
- It Calculates People’s Needs More Precisely. The current poverty threshold is based on food expenses alone. It takes the cost of a basic food budget, as calculated in 1963, and adjusts for inflation. Instead, the SPM looks at what people actually spend today on basic needs: food, clothing, shelter, and utilities. That gives a much more accurate picture of a household’s budget than the current model.
- It Accounts for Location. The current poverty threshold assumes all people need the same amount to survive, no matter where in the country they live. However, surveys such as the annual Consumer Expenditure Survey from the BLS and the Census Bureau’s own American Housing Survey show that isn’t true. Housing costs, which are the biggest expense for many people, vary widely from one city to another. The SPM accounts for that by factoring in rent or mortgage costs for different parts of the country.
- It Counts Benefits as Income. According to the current poverty measure, resources include only actual cash coming into the house: wages, pensions and other retirement funds, Social Security benefits, interest, and dividends. However, many low-income earners also receive various types of financial assistance. For instance, they may receive subsidized housing, food aid such as the Supplemental Nutrition Assistance Program (SNAP) or free school lunches, and home heating aid. The SPM counts all these benefits as resources because they help meet the household’s basic needs.
- It Deducts Certain Expenses. The current poverty measure looks only at total cash income — the amount listed under “total income” on a tax return. However, most people’s actual take-home pay is lower than their total income. Their employer takes a certain amount out for taxes, and there may also be health premiums that come out of pretax pay. Additionally, many people have unavoidable costs — work expenses, child support, or child care costs — that don’t count as taxable income on tax returns. Since these expenses are unavoidable, the SPM doesn’t count the money spent on them as income.
Since 2011, the Census Bureau has released two separate reports every year measuring poverty in America. It bases one report on the official current poverty threshold, while the other uses the SPM. In 2019, the official poverty threshold for a two-adult, two-child family was $25,926. According to the bureau’s first report, 10.5% of the population (34 million people) were below that threshold, thus living in poverty. For context, if all those people constituted an independent state, it would be the second-most populous state in the U.S., between California and Texas, according to 2020 data from the Census Bureau.
The second report for the same year paints a more varied picture. It sets the SPM for the entire country at $29,234 for homeowners with a mortgage and $28,881 for renters. However, this figure differs widely from one part of the country to another. In 16 states and the District of Columbia, the SPM was higher than the official poverty threshold. In 25 states, it was lower, and in nine states, it was more or less the same.
Overall, the second report found slightly more people living in poverty than the first one — 11.7% of all Americans, or around 38 million people (almost equal to the population of California). The difference was especially great for people over 65. According to the official poverty measure, less than 9% of older Americans (4.9 million) live in poverty, but the SPM puts the figure at 12.8% (nearly 7 million).
Defining the Cost of Living
The SPM is more useful than the official poverty guideline as an indicator of how much income people need to barely make ends meet. However, many living wage advocates argue that it still doesn’t reflect a family’s true needs.
A real living wage, they say, should do more than allow people to scrape by. It should enable them to support themselves decently without having to rely on additional help from the government. A worker making a true living wage shouldn’t have to worry every day whether some unexpected expense is going to push them over the edge into poverty.
Various economists and policymakers have tried to analyze the average household budget and develop a guideline for this sort of living wage. Currently, there are two primary alternatives for calculating a living wage, each with its own method for defining basic needs and the income needed to meet them. Their estimates differ significantly, but they’re both considerably higher than either the poverty guideline or the SPM.
The EPI Budget Calculator
In 2015, the Economic Policy Institute (EPI) developed a tool for calculating a living wage. Its budget calculator shows how much money a household needs for a “secure yet modest living standard.” That’s a level of income at which people not only survive but can live in safe, decent conditions.
Like the SPM, the EPI family budget calculator considers food, clothing, and housing costs. However, it also factors in costs the SPM doesn’t, including transportation, health care, child care, and taxes. It also allows a modest amount for extras like phone service, cleaning supplies, personal care items, books, and school supplies. It does not include any money for emergency or retirement savings.
The EPI calculator is adjustable, so you can use it to estimate expenses for households with up to two adults and four children. It uses housing and other expenses for different parts of the country (last updated in 2017) to show how much the cost of living varies by region.
According to the EPI’s budget map, there are some counties in the U.S. where a two-parent, two-child family needs less than $5,000 per month to live modestly and others where it requires more than $9,000 per month. That’s a significant difference, but even the low end of this scale is close to $60,000 per year — more than double both the Census Bureau’s official poverty threshold and the SPM for a family of this size.
The MIT Living Wage Calculator
Another tool for calculating the living wage rate is the living wage calculator developed by Amy Glasmeier, an economic geography and regional planning professor at the Massachusetts Institute of Technology (MIT). It estimates the amount a household needs “to achieve financial independence while maintaining housing and food security.”
Like the EPI calculator, it uses tax and spending data from different parts of the country to estimate the expenses for working families and individuals. It factors in all the basic expenses in a typical household budget, including food, housing, transportation, child care, health insurance, clothing, and personal care. It also accounts for income and payroll taxes.
The MIT calculator is somewhat more flexible than the EPI’s. It can estimate expenses for households with one or two working adults and up to three children. You can also add a second, nonworking adult who provides full-time child care. That increases the number of people living on a single worker’s income but eliminates child care as an expense.
However, MIT living wage calculator’s primary advantage is that in addition to estimating monthly or yearly expenditures, it also shows the hourly wage a worker would need to earn to meet them. For comparison, it also lists the “poverty wage” for a household of a given size — that is, the wage needed to maintain it at the HHS poverty line — and the actual minimum wage in the city or state.
According to MIT, the average living wage at the end of 2019 for a family of two working adults and two children was $21.54 per hour, or $89,606 per year, before taxes. However, it varies widely across different parts of the country — from as low as $76,222 in the McAllen, Texas, region to $131,266 near San Jose, California. Once again, even the lowest estimate from MIT’s calculator is much higher than the official poverty threshold for a family of four — nearly three times as high.
Location, Location, Location
The EPI and MIT calculators offer somewhat different estimates of what constitutes a living wage in America. However, there’s much more variation within each calculator across different parts of the country.
This table shows how each tool estimates the annual cost of living for a family with two working parents and two children in five different areas, including urban, rural, and suburban makeups. For comparison, it also includes the SPM’s estimates of a poverty wage for these same areas. The SPM and MIT costs are based on data from 2019. The EPI figure uses data from 2017. The official 2019 poverty line in the U.S. based on the same family size was $25,750.
|SPM (Poverty Line)||EPI (Living Wage)||MIT (Living Wage)|
|$26,028 for homeowners with a mortgage
$22,713 for homeowners with no mortgage
$25,752 for renters
(Figures are for “Texas Nonmetro.”)
|$67,370||$77,492 ($18.63 per hour)|
|$30,429 for homeowners with a mortgage
$25,825 for homeowners with no mortgage
$30,047 for renters
(Figures are for “Chicago-Naperville-Elgin.”)
|$95,602||$99,551 ($23.93 per hour)|
|Los Angeles, California||$37,468 for homeowners with a mortgage
$30,803 for homeowners with no mortgage
$36,918 for renters
|$92,295||$112,361 ($27.01 per hour)|
|New York City, New York||$35,530 for homeowners with a mortgage
$29,432 for homeowners with no mortgage
$35,026 for renters
(Figures are for “New York-Newark-Jersey City.”)
|$124,129||$112,325 ($27 per hour)
(Figures are for “New York-Newark-Jersey City”)
|Oklahoma City, Oklahoma||$26,888 for homeowners with a mortgage
$23,321 for homeowners with no mortgage
$26,591 for renters
|$81,552||$84,538 ($20.32 per hour)|
These figures reveal a few patterns. For one, the cost of living is generally higher in urban areas than in rural or suburban ones. It’s also higher in big cities than in small ones and higher on the coasts than in more central parts of the country. All these factors put together mean that a living wage in large coastal cities, such as Los Angeles and New York, is much, much higher than in small inland towns.
The chart also shows the official poverty standard is lower than it should be. Even in rural Baird, Texas, the 2019 SPM finds that a family of four with a mortgage needs a little more than $26,000 after taxes to get by, yet the official poverty measure for 2019 is less than $26,000 before taxes. It’s clearly not enough to meet a family’s needs, even in the cheapest parts of the country, and it’s nowhere near enough in expensive coastal cities.
Why a Living Wage Is Higher Than Many People Think
If you live in New York City, you’re probably nodding your head in recognition right now. But if you live in an area with a lower cost of living, it may come as a shock to see that there are places where a family could need over $90,000 per year to pay all its bills. Perhaps you even suspect the data must be wrong somehow.
But there’s no lack of evidence these numbers are accurate. For example, a 2017 survey by CareerBuilder found that across the country, 78% of workers — including nearly 1 in 10 of those making over $100,000 per year — live paycheck to paycheck. And while it’s tempting to think these individuals must be struggling due to poor spending habits, such as dining out too often, the calculations from the EPI and MIT show that in many areas, a family could easily have trouble making ends meet, even on a $100,000 salary.
The detailed cost breakdowns from the EPI and MIT calculators shed some light on just why so many people struggle to get by on what looks like a middle-class income. They identify four expenses that hit budgets particularly hard: child care, housing, transportation, and health care.
According to MIT, the average family of four spends 21.6% of its income on child care — more than it devotes to housing. Like so many other costs, this one varies widely by region.
For instance, according to Child Care Aware, the average cost of day care in Massachusetts is more than $36,000 for an infant and a 4-year-old. For a family with a $100,000 annual income, keeping these two children in day care would eat up more than one-third of its earnings. By contrast, in Arkansas, the average cost for two children of these ages is only $10,936 — around 11% of that same $100,000 income.
MIT reports the average family spends 17.2% of its income on housing. However, this expense varies even more dramatically than child care costs.
In some cities, rent and mortgage costs are ridiculously high. The most notorious of these is San Francisco, where according to a 2018 SmartAsset study, the average rent is nearly $4,400 per month for a two-bedroom apartment. That means a family of four (with the children sharing a room) would have to spend over $52,000 per year on rent — more than half the annual budget for a family making $100,000.
However, the same study found that in Memphis, Tennessee, the average rent for a two-bedroom is just $769 per month, or $9,228 per year. That’s less than 10% of a $100,000 salary.
The Federal Highway Administration (FHA) reports that the average American family spends about 19% of its budget on transportation. This cost also varies by location — but in just the opposite way from housing costs. While housing is usually most expensive in densely populated cities, transportation costs most in the “exurbs” — the distant outskirts of a city, where cars are the only way to get around.
According to the FHA, families in the exurbs spend an average of 25% of their income on transportation. By contrast, those in cities and other walkable neighborhoods can often live without a car, cutting their transportation costs down to 9% of their income. That creates a dilemma for many people: deciding whether to move into the city and pay exorbitant rates for rent or stay out in the suburbs and spend more money — and more time — driving.
Health care costs also take a big bite out of many people’s budgets. According to the Kaiser Family Foundation, the average employer-sponsored family health care plan cost $21,342 in 2020, and workers paid $5,588 of that out of their own pockets. For individuals, the average total cost is $7,470, with workers paying $1,243.
For those who must buy their own health plans, such as self-employed people, the costs are higher still. According to a June 2020 eHealth study, families that purchased a health insurance policy through the federal exchange in 2020 paid an average of $1,152 per month — $13,824 per year — in premiums. On top of that, the average family policy had an annual deductible of $8,439, so a family’s out-of-pocket health care costs could easily come to more than $22,000.
Individuals paid an average of $456 per month ($5,472 per year) with deductibles of $4,364, for a total potential out-of-pocket cost of almost $10,000. That’s significantly better than the cost for families, but if you only make $30,000 per year, it’s still a third of your income.
Many Americans are struggling with one more expense the EPI and MIT calculators don’t even mention: student loan payments. According to the Pew Research Center, 37% of all adults under age 30 and 22% of those aged 30 to 44 have student loans they’re still working to pay off.
Like many other expenses, student loan debt varies by location. According to The Institute for College Access and Success, the average student loan balance for graduating college seniors in 2019 was nearly $29,000. However, in Utah, the average was under $18,000, while in New Hampshire, it was over $29,400. Overall, graduates in the Northeast tend to carry the most debt, while those in the Southwest have the least.
Pro tip: If you have student loan debt, consider refinancing to a lower interest rate. This can help reduce the amount of time it takes to become debt-free. Companies like Credible allow you to compare lenders so you can find the best possible rates. They’re even offering a bonus to Money Crashers readers of up to $750 (bonus is paid via e-giftcard).
A Survival Wage vs. a Living Wage
The SPM and the EPI and MIT living wage calculators offer vastly different pictures of what it takes for a family to get by. All three agree it varies considerably by location, but across all areas, the SPM’s standard is much lower than either the EPI’s or MIT’s. There are differences between the EPI and MIT estimates too, with MIT’s typically being higher. But they’re much closer to each other than either of them is to the SPM.
That reflects the fact that the SPM isn’t really meant to be a living wage in the same sense as the EPI and MIT measures. The SPM is merely an alternative way of calculating the poverty level. It reflects the bare minimum people need to survive, assuming they take advantage of all available forms of government aid.
The EPI and MIT calculators, by contrast, are looking at how much people need to live decently. That means meeting all their basic needs without depending on government benefits. It means living in a home that’s structurally sound and sanitary, eating nutritious food, and having a car if necessary. It also allows for items beyond the bare necessities, such as clothing, cleaning supplies, personal care, and phone or Internet service.
There’s a lot of middle ground between the poverty budget set by the SPM and the living wage set by the EPI and MIT. That means there are many low-wage workers in the U.S. who aren’t technically living in poverty but are still financially insecure. It’s a constant struggle for them to pay for minor expenses like a car repair or new shoes for their kids. They make enough to get by but not to get ahead.
There’s one point on which all three guidelines agree: The current federal minimum wage of $7.25 per hour is not a true living wage. In many parts of the country, it’s not even a subsistence wage.
At $7.25 per hour, a two-earner family would bring in $30,160 per year. Even according to the bare-bones SPM standard, that’s not enough to support a family of four in suburban DeKalb County or urban Los Angeles and New York. And based on the EPI and MIT calculators, it’s not nearly enough in Oklahoma City or Baird.
In fact, according to the EPI and MIT, even Biden’s proposal for a $15-per-hour minimum wage isn’t ambitious enough. In Baird, the cheapest of the five municipalities on the list, MIT calculates it would take two incomes of at least $18.63 per hour to support a family of four. The EPI’s cost of living estimate for Baird is a bit lower, but it still works out to an hourly wage of $16.19, more than a dollar above the proposed level. And in every other city on the list, the minimum wage would need to be around $20 per hour or more.
Of course, passing a minimum wage this high at the federal level is overwhelmingly unlikely. Given how much resistance there is to the idea of a $15-per-hour federal minimum wage, there’s essentially no chance Congress could ever agree on anything like the $27-per-hour living wage needed in Los Angeles.
Fortunately, it doesn’t have to. If the federal government doesn’t intervene, individual states and cities can tackle the problem by passing their own minimum wage laws to ensure workers living there can make enough to maintain a decent, modest lifestyle. Given the wide variation in the living wage across different parts of the country, it’s a viable way to meet workers’ needs in high-priced cities without unduly burdening employers elsewhere in the country.
There’s no way to pin down the meaning of a living wage with a single number. The cost of living varies too much from one part of the country to another. If lawmakers want to set the minimum wage at a livable level for everyone, they’ll have to do it at the city and state levels — which is exactly what’s happening now.
That’s where the EPI and MIT data can be a real help. State and local governments wrangling over the minimum wage can use these tools to figure out just how much a household needs to get by in their area. Based on this information, they can make sensible policy choices — not just about wages, but also about who should qualify for benefits, such as food aid or reduced mortgage rates.
The EPI and MIT calculators are useful for individuals too. Looking at these budget calculators can help you evaluate your household budget and see how the amount you’re spending in different categories compares to the reasonable minimum. You can also use these tools to estimate how much it would cost to have a child or how much you could save by moving to another city.