Minimum Wage, Prevailing Wage and Living Wage: What’s the Difference?

Editor’s Note: This post was originally published in December 2013 and has been updated for accuracy and comprehensiveness.

The terms minimum wage, prevailing wage and living wage are often used interchangeably. However, do you know the true meaning of each? Below is a snapshot of what each term means, who it applies to and where you can find extra resources to learn even more.

Minimum Wage

Minimum wage is the most widely recognized term in the realm of employee compensation. It is the lowest hourly wage an employer can pay an employee for work.

Originally, minimum wage was developed to prevent unethical employer practices like sweatshops where the wage was disproportionately low compared to the work. However, the idea behind minimum wage has evolved. Economic Policy Institute states that it not only helps overcome poverty, but also promotes equality between men and women as it assures the right to equal pay for equal work.

In addition to the minimum wage mandated by the U.S. federal government, 45 states have their own minimum wage rates – some of which exceed the federal rate.

Employees in the U.S. often wonder which minimum wage applies to them, city, county, state or federal. According to the U.S. Department of Labor, an employee is entitled to the law which provides greater benefits.

Prevailing Wage

Prevailing wage typically refers to the rate of pay contractors and vendors must offer their employees when doing business with a government agency. For example, the Los Angeles requires contractors engaged in public works contracts (road construction, for instance) with the City to pay their workers a base level determined by the State of California’s Department of Industrial Relations.

A prevailing wage requirement reduces the ability of vendors to unduly propose costs for government contracts to the detriment of their workers. One of the key components to it’s development was the Davis-Bacon Act of 1931, a federal law that mandated all laborers, contractors and subcontractors be paid a prevailing wage for all public works projects in excess of $2,000.

Living Wage

Living wage is the lowest wage at which the wage earner and his or her family can afford the most basic costs of living.

Because the needs of each employee differ based on marital status, number of children, location and other cost-of-living considerations, the term living wage often pushes many hot-button political issues.

Legislation and policy conversations surrounding the increase of minimum wage quite often intersect with those of living wage. Proponents of a higher federal minimum wage, for example, argue an increase would help the working poor achieve a living wage and reduce the number of full-time workers who rely on government assistance.

Although living wage and minimum wage are often used interchangeably, they differ. For instance, minimum wage is mandated and enforced by legislation whereas a living wage is not.

To learn about the living wage in your area, try MIT’s Living Wage Calculator.

Looking for More Information on Minimum Wage?

Check out our 2017 City and County Minimum Wage Rate Guide for the details on 2017 city and county minimum wage rates.

Also, read more about our new product, GovDocs Minimum Wage, to learn how you can simplify minimum wage rate tracking and management for all your locations.