What is the difference between prevailing wage, minimum wage and living wage? Many people use one of the three terms when discussing wages and salaries but they are all different.
The minimum wage is the most widely recognized term for employee compensation. It is the lowest allowable rate of pay at which an employee may sell their work. This concept was developed in the earliest 20th century to prevent unethical employer practices where the wage was disproportionately low compared to the work. Employees in the United States typically are under the minimum wage law by the state or federal mandate. An employee is entitled to the higher of two minimum wages based on whether the state for the federal is higher.
The prevailing wage refers to the rate of pay that contractors and vendors must offer their employees when doing business with a government agency. “Government” is really the operative word here. The concept of prevailing wage goes back to the late 1800s on a federal level and this is where the Davis Bacon Act comes into play. In 1931 after the Civil War in efforts to bolster local economies, states enacted laws that required any employer awarded certain state or local government contracts to pay its employees a median wage for similar work in the area, city, town or community. This limited employers to recruit lower wage workers from outside the area or the state.
This Davis Bacon Act also required employers with federal public work contracts to pay a prevailing wage to keep local workers employed by federal contacts. This was to reduce unemployment rates across the nation.
The living wage is the lowest wage at which subsistence needs can be met by an employee. Everyone’s needs are slightly different based on the level of lifestyle, how many kids they have an marital status as well as cost of living in a particular area. Living wage can also include general benefits such as health and dental care as well as overtime.
Many political conversations and controversies surround them wage and living wage and the differences between the two when it comes to a general employee. Sometimes living wage and minimum wage are used interchangeably but they are different from one another. Minimum wage is mandated and enforced by legislation whereas the living wage is not.
Living wages ordinances began in 1994 in Baltimore and were initiatives designed to strengthen the local economy and protect local workers by setting up minimum wages that meet or exceed the poverty level. More than 100 localities in the US have living wage ordinances in effect.
“Although most employers are required to pay only the federal or state minimum wage, employers with certain federal or state contracts, subsidies, grants or loans, or those of a certain size or in a certain locality may be required to pay a prevailing or living wage, whichever is higher.” [Source]
For more answers to your questions on living wage, prevailing wage and minimum wage, contact our office today.