Connecting the Cost of Living to the Minimum Wage

California has a new minimum wage. While the new hourly minimum is $16, fast food and most healthcare workers will get more. Starting April 1, the fast food minimum is $20; for healthcare, it’s between $18 and $23.

In the past, we’ve looked at whether raising the minimum wage diminishes the number of jobs. Today, let’s see what you can buy.

Our Bottom Line: Cost of Living

MIT’s Living Wage Calculator tells us what an individual can spend after taking home a year of full time pay. That pay could be the minimum wage, a poverty wage, or a living wage. Annually, it covers 2080 hours of work.

We have to start by deciding where the person lives.

California

One possibility is Alameda County, where Oakland, California is located. As a large city, it has a representative population. Because the MIT Calculator has not yet recalibrated, they use the $15.50 old minimum wage. In addition, they identify $22.35 as a living wage for one adult with no children and $6.53 as the poverty wage for that same individual. To calculate a living wage, they used a predictable list of estimated expenses that included food, child care (if there are children), medical expenses, housing, and transportation.

If you are one adult with one child earning a living wage, before taxes, your annual income needs to be $100,148. For two adults, both working, with two children, the total goes up to $139,375. When I multiply a minimum wage of $16.00 by 2080 hours, I get $33,280, far short of what you need to cover your expenses in Alameda County California.

Mississippi

With Mississippi, I chose the link that looked at the state as one unit rather than selecting a county. Very different from California, the living wage for one adult with no children is $15.42 while the minimum wage plunges to the federal minimum of $7.25. Also leaping downward, the poverty wage is $6.53. But then, with the cost of living much lower, our single adult with one child earning a living wage, before taxes, needs to earn $64,517. Correspondingly, for two adults, both working, with two children, the total goes up to $89,991.

Other States

Skimming other states’ numbers, I found them entirely predictable. Across the U.S., the cost of living does indeed impact the purchasing power of the minimum wage. And everywhere, it is inadequate.

The Gap

Graphically, we can see the huge gap between a high minimum wage and a living wage, mostly in California:

Our Bottom Line: The Tradeoffs

While the minimum wage is not close to a living wage, it has another downside. The WSJ headline says it all:

In past econlife posts, we’ve seen that prices did increase or laborsaving tech was added when the minimum wage went up. As economists, we know that somewhere, someone has a cost. There is always a tradeoff. And, sometimes (as with the minimum wage), by recognizing the tradoff, it is easy to make a decision.

My sources and more: Yesterday’s WSJ alerted me to California’s minimum wage hike. Now familiar with the MIT site, I was delighted to learn about it through a WSJ link. Then, The Hustle’s graphic came in handy.