Living Wages: Bridging the Gap Between the Cost of Labor and the Cost of Living

Understanding what it truly means to pay a living wage is more important than ever. As organizations navigate rising costs, tight labor markets, and growing expectations for fair pay, distinguishing between the cost of labor, cost of living, and a living wage is essential.

As a follow up to our June blog on living wages and why they matter, we outline the cost of labor, cost of living, and how a living wage is a distinct, third measurement.

The cost of labor varies based on an organization’s market position, total rewards strategy and total rewards package, industry benchmarks, market competition, type of job, level of job responsibilities, and the knowledge, skills, and behaviors required to perform a job’s duties. It is generally not as variable as the cost of living and is the measurement most employers use when developing compensation structures and determining pay ranges.

The cost of living varies geographically and is used to measure how much the basic needs of goods and services cost to consume in a specific region, city, or locale. Cost of living is influenced by economic factors which raise and lower the costs of meeting basic needs as the economy fluctuates. Employers do not typically tie their compensation structures only to the cost of living as it is not a true measurement of wages on their own, like the cost of labor is.

The estimated living wage varies based on a specific geographic location, the market price of necessities (i.e., food, childcare, medical, housing, transportation, internet/telecommunications, and tax burden), and household size and demographics (i.e., 1 working adult, 2 working adults, 3 children, etc.). For example, a dual working adult household with no children has a different living wage than a household comprised of a single working parent and two kids.

Historically, the pay ranges used to determine employee wages are informed by the cost of labor only; however, with rapidly rising costs of living, there is an opportunity to think differently.

Comparing Minimum Wage Rates to Living Wage Benchmarks

Estimated living wages for the state of Oregon, courtesy of the MIT Living Wage Calculator, are all above the current mandated state minimum wage rates, and in some cases are over triple the Oregon standard minimum wage.