Living wage is a theoretical concept that sets a minimum required salary of a worker for him or her to afford the basic necessities in life.
The basic necessities include food, housing, and other essentials such as shoes.
The income of a person would be enough to prevent one from living in poverty and be self-sufficient enough to not be dependent on government subsidies for living expenses.
It is sometimes assumed that living wage is minimum wage. But they are not the same.
A minimum wage can be at a level either higher, lower, or the same as living wage.
A minimum wage equal to, or higher than living wage means that the worker would be able to comfortably afford the necessities of living.
A minimum wage lower than a living wage means that even though law dictates that an employed person is paid a minimum amount, it would still be insufficient to provide basic needs of that person.
This is despite minimum wage labour regulations are usually created to serve the purpose a living wage provides.
What determines living wage
The most important factor which would influence living wage is the standard of living of the area in question.
For example, the living wage for Thailand can be vastly different from Singapore since the costs of food and housing can be significantly different. Thus, it cannot be at the same level across different economies.
But since it’s a theoretical concept, we can theorize what types of variables should be factored in when working out an equation for living wage.
- Monthly mortgage / rental
- Food
- School fees
- Transport
- Healthcare
- etc
It must also be added that different places might have different needs that are considered as essential for basic living.
For example, people in countries located geographic regions that experience the 4 seasons would require winter wear and equipment to survive the winter. Countries having tropical weather would not have that necessity.
It is also generally accepted in this theory that no more than 30% of household income should be used on housing.
Argument against living wage
The argument against implementing living wage at a macro level is very much the same as the drawbacks of introducing a minimum wage into law.
This can create deadweight loss that can potentially have a detrimental effect on society as a whole instead of good nature behind it’s intention.
It can also negatively impact the productivity of workers as they are not incentivized to improve since being on a living wage payroll would guarantee a comfortable income to live on without going above and beyond what is expected of them at work.
When someone is incentivized to work harder for more income, then he or she might find more motivation in self-improvement.
On the other hand, low productivity worker might find no motivation to improve their skillset as they are getting the same salary as high-productivity employees.
As can be observed, for all the good intentions of living wage, they are some potential drawbacks are can be hard to balance after things start to go wrong.
This is why it is not a concept that is generally accepted as a positive by economists.
To avoid deadweight loss, companies sometimes offer benefits in the form of subsistence allowance to employees who need help, and remove it when they are more financially stable.
