Wage Index 101: Calculating Living Wages

As a benefit corporation established in 2023, the Living Wage Institute builds compensation tools for America’s hourly workforce. As part of that work, we maintain and expand the nation’s most comprehensive database of county-level living costs—data that employers use to benchmark compensation, policymakers rely on to set wage policy, and researchers turn to for labor market analysis.

The methodology behind our Wage Index database is grounded in decades of research and continuously refined to reflect economic reality. Below, we explain how we produce it—what costs we include, how we estimate taxes, and how we aggregate data across geographic areas.

What is a living wage and what costs does it include?

The Wage Index database is built around a core concept—the living wage, or  what a typical full-time worker must earn per hour to cover the cost of their family’s basic needs where they live. Based on Maslow’s hierarchy of needs, our estimates account for eight essential needs—food, childcare, health care, housing, transportation, civic engagement, internet and mobile services, and other personal care necessities.

For these essential or basic needs, we identify the goods and services that best fulfill them, and then price them using county-level cost data. This approach—identifying the specific goods and services that meet needs and then pricing them out—is called a market basket approach. We repeat this market basket approach for all eight essential needs across 12 different household or family types.

In general, we assume that households will select the lowest cost option that meets their needs at a minimum but adequate level. As a result, the living wage represents a basic, no-frills, but decent standard of living, and does not budget for eating at restaurants; leisure time, holidays, or unpaid vacations; or savings, retirement, and other long-term financial investments. 

Taxes, final calculations, and aggregation

Once we have calculated the costs for each basic need, we sum them together to arrive at a basic needs budget—what a household needs to afford their expenses. 

To estimate federal and state tax obligations, we use PolicyEngine’s open-source TAXSIM emulator. We start by assuming that taxes represent roughly 22% of gross income, and adjust these estimates iteratively until households have enough income left over to pay for their basic needs expenses after taxes. 

Once we have the required household income, we divide it by the number of working adults in the household and by the total annual hours worked by a full-time worker (2,080 hours) to calculate an hourly living wage. The living wage is always reported as the hourly rate one full-time worker needs to earn, assuming all working adults in the household earn the same wage.

While the living wage data is primarily meant to be used at the county-level, we also provide estimates for broader geographies, including Core-Based Statistical Areas (both metropolitan and micropolitan areas), all 50 states plus Washington, D.C., and Census divisions and regions.

Put our data to work for your organization

Whether you're evaluating compensation across multiple markets, analyzing regional labor costs, or designing competitive frontline pay, we offer flexible data access—from bulk extracts to custom analysis—designed to fit your organization's workflow and strategic needs.

Interested in using our Wage Index database at your organization? Contact us to discuss data access, custom extracts, or partnership opportunities.

To learn even more about our methodology, please read our technical documentation or reach out here.