Living Wage Calculator Methodology
What is a living wage and how is it calculated?
Today, families and individuals working in low-wage jobs make too little income to meet minimum standards of living in their community. But just how much do families need to meet these minimum standards? Policymakers often turn to measures like the federal poverty line – a national number based on three times the cost of a minimum food diet in 1963 – to answer that question. However these benchmarks no longer reflect the true cost of living in a modern economy. We developed the Living Wage Calculator starting in 2003 to more comprehensively estimate the employment earnings – or the living wage – that a full-time worker requires to cover or support the costs of their family’s basic needs where they live. Today, the calculator features geographically-specific costs for food, childcare, health care, housing, transportation, other basic needs – like clothing, personal care items, and broadband, among others – and taxes at the county, metro, and state levels for 12 different family types.
Read on for an overview of how we calculate the living wage or dive into the technical documentation for a more detailed description of our methodology.
At its simplest, a living wage is what one full-time worker must earn on an hourly basis to help cover the cost of their family’s minimum basic needs where they live while still being self-sufficient. Here’s an at-a-glance guide on what you need to know about how we calculate it.
We produce a living wage estimate for 3,142 counties to account for the geographic variation in costs across the U.S. The data is also available for 384 Metropolitan Statistical Areas (MSAs or metros) and 50 states plus Washington, D.C.
For each geography, there is a living wage estimate for 12 family types, with varying numbers of adults and children as detailed in the graphic below. It’s important to note that in households with multiple full-time working adults, the living wage is what one of them would need to earn hourly at a full-time job, assuming the other is also earning the same.
There are eight basic needs – food, childcare, health care, housing, transportation, civic engagement, broadband, and other necessities – that make up the cost components of the living wage, with an additional cost associated with income and payroll taxes. Use the table below to explore the data sources for each of these components included in the living wage estimates for 2023. Because each source includes data from different years, all data used in calculating a living wage is adjusted for inflation to December 2022 dollars using the Consumer Price Index-All Urban Consumers (CPI-U).
|Food||2021||USDA Food Plans: Cost of Food Reports|
|Childcare||2019||State Child Care Market Rate Surveys; County-level childcare provider surveys; Childcare provider outreach|
|Health Care||2021||Health Insurance Costs: Medical Expenditure Panel Survey Health Insurance Component Analytical Tool (MEPSnet/IC)|
|2021||Line items for Medical Services; Drugs; and Medical Supplies: U.S. Bureau of Labor Statistics Consumer Expenditure Survey, Table 1400; U.S. Bureau of Labor Statistics Consumer Expenditure Survey, Table 1800|
|Housing||2022||U.S. Department of Housing and Urban Development Fair Market Rents (40th Percentile Rents)|
|Transportation||2021||Line items for Cars and Trucks (used), Gasoline and Motor Oil; Other Vehicle Expenses; and Public Transportation: U.S. Bureau of Labor Statistics Consumer Expenditure Survey, Table 1400; U.S. Bureau of Labor Statistics Consumer Expenditure Survey, Table 1800|
|Civic Engagement||2021||Line items for Fees and Admissions; Audio and Visual Equipment and Services; Pets; Toys; Hobbies; Playground Equipment; Other Entertainment Supplies, Equipment, and Services; Reading; and Education: U.S. Bureau of Labor Statistics Consumer Expenditure Survey, Table 1400; U.S. Bureau of Labor Statistics Consumer Expenditure Survey, Table 1800|
|Broadband||2021||Analysis of regional differences in price across providers using BroadbandNow; Geographic analysis of cell phone service costs|
|Other Necessities||2021||Line items for Apparel and Services; Housekeeping Supplies; Personal Care Products and Services; Reading; and Miscellaneous: U.S. Bureau of Labor Statistics Consumer Expenditure Survey, Table 1400; U.S. Bureau of Labor Statistics Consumer Expenditure Survey, Table 1800|
|Income and Payroll Taxes||2022||National Bureau of Economic Research TAXSIM|
FAMILY BUDGET AND LIVING WAGE CALCULATION
Calculating the actual hourly living wage for each county and each family type is a four step process, summarized in the figure below.
What are basic needs?
The Living Wage Calculator’s estimates are based on the costs of eight components, each of which represents a basic need: food, childcare, health care, housing, transportation, civic engagement, broadband, and other necessities. It also includes relevant income and payroll taxes, but we’ll come back to that later. In general, it is assumed that families select the lowest cost option that enables them to meet each of these basic needs at a minimum but adequate level. As such, the living wage does not budget for eating out at a restaurant or meals that aren’t prepared at home; leisure time, holidays, or unpaid vacations; or savings, retirement, and other long-term financial investments.
Below, explore the definitions and underlying data sources for each of the cost components of a living wage.
How is a living wage calculated?
Once costs for each basic need have been estimated, the living wage is calculated in four steps for each of the 3,142 counties. Then, an additional step aggregates county-level living wages into metro and state estimates.
While property and sales taxes are already included in the estimated cost of each basic need, the additional cost of income and payroll taxes are calculated using the National Bureau of Economic Research’s TAXSIM, a microsimulation model of the U.S. federal and state income tax system. For the inputs into the model, the annual family budget after taxes is used as a proxy for income; the family composition determines the filing status and number of dependents; and the county helps identify the state of residence. Based on these inputs, the TAXSIM model multiplies the annual family budget after taxes by the marginal tax rate to roughly estimate an output for the amount owed in federal and state income and payroll taxes, assuming that an employer covers half – or 7.65% – of the FICA payroll tax liability. The federal and state income and payroll taxes are added to the annual family budget after taxes, yielding an annual family budget before taxes.
METRO- AND STATE-LEVEL LIVING WAGES
While similar goods and services are available across the U.S., factors like state and local tax rates, market demand, competition, shipping, logistical costs, and seasons, among others can greatly impact the local prices of basic needs. To account for this localized variation in costs, the Living Wage Calculator data is computed and primarily meant to be used at the county-level. For ease of reporting, however, we also provide living wage estimates for 384 Metropolitan Statistical Areas – more commonly called MSAs or metros – and each of the 50 states. To aggregate county-level data to these larger geographic areas, where applicable, we use county population estimates from the U.S. Census Bureau to take a weighted average of the living wage – or its underlying components – across counties.
What’s different between this year and last year?
While the methodology to calculate a living wage remains relatively consistent year-over-year, changes in the underlying data sources can increase or decrease the estimates for the cost of basic needs or the living wage overall each year.
This year, there were changes in the data for two cost components – housing and income and payroll taxes. While on net the cost of living has increased due to inflation, the changes in the underlying data for housing and taxes have minimally offset that growth, resulting in slightly lower living wage estimates for some geographies and family types.
The decrease in housing costs in some locations can be attributed to a shift in availability in the U.S. Department of Housing and Urban Development’s (HUD’s) Fair Market Rents database. In 2022, the public data featured the 40th percentile rents instead of the 50th percentile rents used in previous years, which means that the estimates for housing costs are based on a lower threshold than before.
Reductions in the expense incurred from income and payroll taxes are due to a change in data source altogether. This year, we shifted to using the NBER TAXSIM model – from the Urban-Brookings Tax Policy Center Microsimulation Model – for all tax calculations. Further, because the TAXSIM model calculates taxes associated with the Federal Insurance Contributions Act (FICA) as the full 15.3% of income – which is meant to be split equally between employers and employees – we divide the FICA contribution by two to more accurately represent the worker's own tax liability.
Want to learn more?
To learn even more about the Living Wage Calculator’s methodology, please read our technical documentation or submit a question through our Contact Us page.