Business Basics
How much of the cost of living is covered by minimum wage?

How much of the cost of living is covered by minimum wage?

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There are shared characteristics of minimum wage employees—for example, they tend to be young, female, or uneducated. However, the percentage of minimum wage workers also varies by state. For example, almost 5% of hourly workers in Louisiana make equal to or less than the minimum wage, while in Washington, the proportion is closer to 1%.

We were curious if these regional discrepancies had anything to do with the differences in the living wage—the minimum income necessary to cover the costs of living—for those areas, so we did a little research.

Minimum wage vs. living wage

First, we tracked down the current state minimum wages (as of January 1, 2020). Next, we researched the differences in living wages by state—comparing income for an individual versus a family of four.

Our goal was to determine how often the state minimum wage was adjusted to cover the cost of living for that region. We chose to represent our data as a percentage (in other words, minimum wage as a percentage of living wage).

Note: For states with no legal minimum specified, we defaulted to the federal minimum rate—$7.25/hr.

What percentage of the cost of living is covered by minimum wage?

The current federal minimum wage is $7.25/hour (as of July 24, 2009). Typically, employees are entitled to the higher of their state or the federal minimum. It is possible for workers to be paid less than the relevant minimum. These exceptions can become quite technical, but come into play when a worker is not covered by the Fair Labors Standards Act, and include independent contractors, tipped employees, and some farm workers.

While 29 states have established a minimum wage higher than the current federal rate, when you compare minimum wage to cost of living, only one state has a minimum wage higher than the living wage for a single individual.

Add one additional person to that family, and not a single state ensures a minimum wage that would cover the cost of living. In fact, when we calculated minimum wage as a percentage of living wage for a single-income family of four, every total was below 50% of the living wage.

Cost of living covered by minimum wage

The percentages improve slightly for dual-income families (though living costs also increase for this group). On average, the minimum wage still only covers 54% of the costs of living for a family of four with two working adults.

If you take the national average for minimum wage ($9.08/hr) as a percentage of the average national living wage, the wages would cover 74% of the living wage for 1 adult, and 34% of the living wage for a single-income family of four.

Note: This analysis doesn’t address the minimum wage for tipped employees which is significantly lower—starting at $2.13/hour.

What would a $15/hr minimum wage mean?

Last year, the House passed a bill to raise the federal minimum wage to $15/hour by 2025; this has also been a popular speaking point for Democratic candidates in the 2020 presidential election.

We were curious if data could shed some light on the issue. Using the same methodology, we ran a hypothetical analysis of minimum wage as a percentage of living wage if all states had $15/hr as the minimum.

In this instance, all but three states—New York, Massachusetts, and Hawaii—were able to provide a minimum wage that covered the cost of living for a single adult.

However, when we ran the numbers for a single-income family of four, $15/hr still didn’t cut it—in any of the 50 states. However, percentages were much improved. In this hypothetical situation, $15/hr covered an average of 57% of the costs of living nationwide.

Hawaii, the state with the highest living wage, would require $15.82/hr to cover the living wage for a single working adult. While $15/hr would make a major difference in most states, for a federal rate to cover inequities across all states, $15.82 would need to be the new minimum.

Minimum wage does not cover the cost of living

The data suggests that under current state and federal minimum wage law, it is rare for the full-time income of US minimum wage earners to cover their cost of living, especially if they’re providing for more than just themselves. The House-passed bill (not taken up by the Senate, and thus, not law), could significantly change that dynamic.

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