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Minimum Wage, Living Wage and Fair Wage: How Do They Differ and Why Should You Care?

April 17, 2015

The topic of minimum wage standards is in the news again; in fact, the subject seems to be a constant source of confusion and debate. Making matters more complex these days is the fact that new terms have emerged: “Living Wage” and “Fair Wage”. There are, indeed, important distinctions between all three terms. And if you are responsible for workforce compensation and are concerned with how your organization can attract and keep talent while remaining competitive and profitable, here are some key points you should know:

Definitions

The best place to start when seeking to understand the differences and impact of minimum, living and fair wages is with how they are defined:

  • Minimum wage is the lowest amount mandated by law that an employer may pay a worker in a particular jurisdiction. It typically represents the starting wage for the least-skilled employees. Most workers in the United States are subject to the minimum wage rate of $7.25 per hour established in 2009. (However, “tipped labor” such as restaurant servers may be paid an hourly rate of $2.13 as long as tip income plus the hourly base rate meets or exceeds $7.25). These are U.S. federally-mandated minimum wage standards; however, minimum wages can be higher in state or local jurisdictions.
  • A Living Wage, on the other hand, can be defined as a baseline amount (which can vary from region to region) that allows workers and their dependents to enjoy “decent” living standards. This “quality of life” standard would cover things such as food, housing, and reasonable discretionary expenditures.
  • A so-called Fair Wage might use Living Wage as a foundation, but add in factors for inflation as well as corporate concerns such as overtime pay and profit sharing. The Fair Wage Network’s definition of Fair Wage includes: “Wage levels and wage-fixing mechanisms that provide a living wage floor for workers, while complying with national wage regulations […], ensure proper wage adjustments and lead to balanced wage developments in the company….”

Looking Beyond Minimum Wage

While the minimum wage standards might be relatively simple to understand and apply, they might not be the appropriate baseline standard for employee compensation in your geographic region, your industry or your business. According to HR Magazine, in the U.S. in 2011, the “minimum wage was little more than 30 percent of the average wage.” This shows that, for most businesses, minimum wage is but one level in their compensation structures. What’s more, states and municipalities can – and often do – enact higher standards aimed at being more relevant to their workforces. The city of Seattle, Washington, for example, recently passed legislation phasing in a new minimum wage of $15.00 per hour – more than twice the federal standard at the time of adoption. This hefty minimum wage hike has been contentious; lawsuits have been filed challenging the newly enacted rate.

The concepts of Living Wage and Fair Wage, on the other hand, continue to evolve. Because of this, they can be more difficult to quantify and complex to implement. They are perhaps best defined at the corporate level depending on many factors, both external and internal to the organization.

Total Compensation

It is important to remember that minimum wage standards – as well as the evolving concepts of living and fair wages – are merely the financial compensation components of a bigger-picture total compensation plan. When considering employee contributions to the bottom line and their impact on corporate expenses, total compensation costs, including employee benefits, must be known and considered.

And to fully understand the external factors that impact a well-defined total compensation plan, you’ll need data. Exhaustive reports providing this type of context are often available by region or industry, but they can cost thousands of dollars. Even then, they provide only facts and factors from which to build an equitable compensation program; they don’t set the appropriate wage rates for you.

Bottom Line:

As it becomes clear, region by region and industry by industry, that minimum wage standards are not necessarily the right foundation for corporate compensation standards, complexity creeps in. Living and Fair Wage standards are not yet fully understood or easily implemented. And because the necessary data can be costly and difficult to analyze, most companies have neither the time nor the staff available to design and implement appropriate compensation programs. That’s where we come in. At Total Reward Solutions, we have the knowledge, experience and big-picture outlook that can help you craft the right compensation programs for your business. To learn more, contact us today at 317.589.8529.

Posted Under: Compensation