The terms "minimum wage" and "living wage" are both used to describe certain aspects of wages and salaries as they relate to the benefits extended to employees. Some confusion about what is meant by each term occurs, making it necessary to define the differences between each type of wage. Essentially, a minimum wage is a set amount per hour that employers are required to pay employees within certain classes of employment, as long as those employees meet the qualifications put in place by the wage laws that apply in a given jurisdiction. By contrast, a living wage is the amount that an employee must earn in order to enjoy an equitable standard of living within a specified area or region.
One of the chief differences between a minimum wage and living wage is that the former is often fixed while the other is variable. For example, a national government may set the minimum wage that applies to all employees covered by the applicable wage laws, and employers in all parts of the nation must comply by paying qualified employees at least that minimum wage. With a living wage, the amount required to enjoy a decent standard of living may be higher in some areas, such as metropolitan areas, while a lower wage would allow that same level or standard of living in a different area like a rural location.
Another difference between minimum wage and living wage is that the minimum wage is a matter of public policy, with the amount set based on financial analysis conducted under the auspices of a government entity. The living wage is more subjective and is based on what households must pay in order to meet basic needs while living in a particular locale. Governments do not set living wages, although it is not unusual for data regarding the average cost of living in different areas to have some impact on how a minimum wage for an entire country is determined.
There are situations in which a minimum wage and living wage may be very close in terms of the actual amount. This is true in areas where the cost of living is relatively low. More often, the average living wage is noticeably more than the current minimum wage required by law, prompting consumers who must work for minimum wage to make housing arrangements that include sharing living space and expenses with friends or relatives. When the gap between the minimum wage and living wage increases too rapidly, many governments will intervene in the function of the economy, often working to promote decreases in costs that slow the forward movement of the living wage and preventing greater disparity in the overall economy.