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.

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 such a methodology would prove tedious and even more challenging to execute as a country such as South Africa that 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 generalized formulas which are computationally easier to calculate and apply, however, they treat all individuals as equal units, and it 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 United Kingdom (UK) stagger their minimum wage per hour based on the age of the individual.

            Source: https://www.gov.uk/national-minimum-wage-rates

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 that 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 there. Some of the areas to be considered when trying to establish the needs of an individual are:

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 it can also hamper their future career development e.g., leaving 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. E.g., 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 are 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.

The 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 (have actively looked for work in last 4 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 further exacerbate this situation.

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 more developed economy than a less developed economy. Having said that, 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.

Written by:

Bryden Morton, B.Com (Hons) Economics, Executive Director – This email address is being protected from spambots. You need JavaScript enabled to view it.

Chris Blair, B.Sc Chem. Eng., MBA – Leadership & Sustainability,  CEO – This email address is being protected from spambots. You need JavaScript enabled to view it.

About 21st Century
21st Century, a level 2 BBBEE company, is one of the largest Remuneration and HR consultancies in Africa, with a team of more than 60 skilled specialists, servicing over 1700 clients – including non-profit organisations, unlisted companies, government, parastatals and over two-thirds of the companies listed on the JSE. 21st Century offers bespoke business and strategy planning services, operating model and organisational design, creative reward practice modelling, change, stakeholder and culture management, training courses and comprehensive human capital and talent plans. These are all underpinned by our analytic and survey capability tailored to the African environment. 21st Century continues to offer solutions via a combination of virtual channels and on-site presence. 

21st Century has expanded its services to offer a full turnkey sustainable business and remuneration service. Beyond remuneration and reward consulting, 21st Century offers local analytics for business advantage; remuneration and HR training; change management services; talent and people solutions; and end-to-end organisational design and development.

Issued By: The Lime Envelope
On Behalf Of: 21st Century
For Media Information: Bronwyn Levy
Telephone: 076 078 1723
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