What is a living wage and how do we define it?

The concept of a ‘living wage’ has gained much attention in recent years, spurred on further by the economic shockwaves caused by the Covid pandemic.

There have been many views expressed in terms of what constitutes a living wage and how it should be calculated. Some believe it can be calculated using a few fundamental economic data points, while others believe that more attention should be paid to other, non-remuneration aspects such as number of dependents and number of income earners per household.

Read: Minimum wage must not distract from working towards living wage

In the humanistic approach, individuals are viewed holistically as human beings who know what they need and define what constitutes a decent life for themselves. This approach seeks to go beyond the purchasing power element of a living wage and evaluate social elements of the individual’s life as well (such as standard of living).

Other, more quantitative methods include regression modelling, purchasing power parity and cost of living analysis that treat individuals as units that are measured against a set of criteria to determine the living wage.

The quantitative approaches tend to be insensitive to individual considerations.

The humanistic approaches provide more understanding of the unique environment faced by each person.

Computationally however such a methodology would prove tedious and even more challenging to execute as a country such as South Africa – which has equal pay for work of equal value laws – does not make provision for outside of work circumstances when determining fair pay in the workplace.

Conversely, the quantitative approaches seek to create generalised formulas that are computationally easier to calculate and apply. However, they treat all individuals as equal units, and the approach does not seek to understand individual circumstances.

A blend of the two views is required for the methodology to be as inclusive as possible, yet executable in an efficient manner.

Each country has its own unique circumstances that influence the determination of a living wage. A similar (although not exact), example is how the UK staggers its minimum wage per hour based on the age of the individual.

In a country that has high levels of social security, high GDP per capita and low rates of unemployment, the above model makes sense as the assumption is that those who are older will have more responsibilities than those entering the labour market at the younger ages. If we had to try to apply that to South Africa, there would be a number of local challenges that are not present in the UK.

Aspects to consider

Some of the areas to be considered when trying to establish the needs of an individual are detailed below.

Home living conditions

Unfortunately, the local economy has a high number of dependents per salary earner, with workers often assisting households beyond their own (such as extended family members).

There is also a higher rate of youth and child-headed households which not only impacts these individual’s need to earn a living wage now, but can also hamper their future career development (by, for example, having to leave school to earn an income for the household).

Local productivity levels

This may seem counter-intuitive since we have been discussing the need to take individual needs into account, but local productivity will impact all individuals and the economy. For example, if the living wage is determined to be 30% above the existing minimum wage and a national 30% increase is applied to 25% of all employed South Africans (as an example), there will be numerous effects.

These could include local inflationary effects, devaluation of the currency if the supply of rands is increased and also a decrease in SA’s international competitiveness if the same number of goods is produced (same productivity) but the cost per unit has increased.

If SA becomes less competitive and more expensive, this will negatively impact the number of jobs available as demand for our local products decrease.

Local unemployment rate

The unemployment rate indicates how many people are presently looking for work but are unable to find work for whatever reason. South Africa’s current strict definition (people who have actively looked for work in last four weeks) states that the Q4 2021 unemployment rate reached a record high of 35.3%.

This means that if three members of the labour force are standing together, then statistically one of them should be unemployed which is an unsustainable situation given current economic conditions.

For this reason, the implementation of a minimum (or living) wage cannot afford to have the unintended consequence of crowding out entry level jobs.

SA is already facing a youth unemployment crisis and care should be taken to not exacerbate this situation.

What the evidence suggests

The evidence present in real-life cases where minimum wages have been increased closer to the level of what is deemed a ‘living wage’ suggests that it is easier to implement a living wage in a more developed economy than a less developed economy.

This does not mean it is impossible to implement in a developing economy.

Developing economies may have more variables impacting the viability of the implementation of a living wage and higher consequence of error but all this means is that greater care must be taken in the planning and implementation of the living wage.

A slow, incremental move towards a defined date such as a 2030 vision (with a roadmap in place to guide milestones) can provide an opportunity for constant monitoring and evaluation of the process over time.

This will limit the impact of any particular step and provide multiple opportunities to review progress and the achievability of the end goal.

Finding the right living wage for each local economy may be a challenging task, but given the right research, policies and implementation, progress can be made towards achieving this ‘tricky’ goal.

Bryden Morton is executive director and Chris Blair is CEO at 21^st Century.