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

The concept of a “living wage” has received a lot of attention in recent years, further spurred by the economic shock waves caused by the Covid pandemic.

Many views were expressed on what constitutes a living wage and how to calculate it. Some think it can be calculated using a few economic fundamentals, while others think more attention needs to be paid to other non-remuneration aspects, such as the number number of dependents and the number of breadwinners per household.

Read: Minimum wage should not divert attention from work to a 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 also assess the social elements of the individual’s life (such as standard of living).

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

Quantitative approaches tend to be insensitive to individual considerations.

Humanistic approaches provide insight into the unique environment each person faces.

However, computationally, such a methodology would prove cumbersome and even more difficult to execute because a country like South Africa – which has equal pay for work of equal value laws – does not provide circumstances outside of work when determining fair pay in the workplace.

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

A mix of both viewpoints is needed for the methodology to be as inclusive as possible, while being effectively implementable.

Each country has its own unique circumstances that influence the determination of a living wage. A similar (but not exact) example is how the UK scales its minimum hourly wage based on an individual’s age.

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

Considerations

Some of the areas to consider when trying to establish an individual’s needs are detailed below.

Home living conditions

Unfortunately, the local economy has a high number of dependents per employee, with workers often helping households other than their own (such as extended family members).

There is also a higher rate of youth and child-headed households, which not only impacts these people’s need to earn a living wage now, but can also hinder their future professional development (ahead, for example, leaving school to earn an income while cleaning).

Local productivity levels

It may seem counter-intuitive since we are discussing the need to consider individual needs, but local productivity will impact all individuals and the economy. For example, if the living wage is set at 30% above the existing minimum wage and a national 30% increase is applied to 25% of all employed South Africans (for example), there will be many effects.

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

If South Africa becomes less competitive and more expensive, it will have a negative impact on the number of jobs available as demand for our local products declines.

Local unemployment rate

The unemployment rate indicates how many people are currently looking for a job but are unable to find one for some reason. South Africa’s current strict definition (people who have actively looked for work in the last four weeks) indicates that the unemployment rate in the fourth quarter of 2021 reached an all-time high of 35.3%.

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

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

South Africa is already facing a youth unemployment crisis and care must be taken not to worsen this situation.

What the evidence suggests

Evidence from real cases where minimum wages have been raised closer to the level of what is considered a “living wage” suggests that it is easier to implement a living wage in a more developed economy than in a less developed economy.

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

Developing economies may have more variables impacting the viability of living wage implementation and higher consequences of error, but all of this means more attention needs to be paid to planning. and the implementation of the living wage.

Slow, incremental movement towards a set 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 a particular milestone and provide multiple opportunities to review progress and the feasibility of the end goal.

Finding the right living wage for each local economy can be a difficult task, but with 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 of 21st Century.

Michael A. Bynum