Unique challenges faced by SA in determining a living wage

The concept of a “living wage” has gained much attention in recent years, spurred on by the economic shock waves caused by the Covid-19 pandemic. There have been many views expressed on 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 more attention should be paid to other, non-remunerative aspects such as the number of dependents and the 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 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 in a country such as SA that has “equal pay for work of equal value” laws — it does not make provision for outside 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 do 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 (though 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, that model makes sense as the assumption is that those who are older will have more responsibilities than those entering the labour market at younger ages.

If we had to try to apply that to SA, there would be a number of local challenges. 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 not only affects these individuals’ need to earn a living wage now, but can also hamper their future career development, for example leaving school to earn an income for the household;
• Local productivity levels: This may seem counterintuitive as we have been discussing the need to take individual needs into account, but local productivity will affect 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, the numerous effects could include local inflationary effects, devaluation of the currency if the supply of rand 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 affect the number of jobs available as demand for our local products decreases; and
• Local unemployment rate: The unemployment rate indicates how many people are presently looking for work but are unable to find it for whatever reason. SA’s current strict definition (actively looking for work for four weeks) states that the unemployment rate in the fourth quarter of 2021 reached a record high of 35.3%. This 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 not to further worsen it.

The evidence, in real-life cases where minimum wages have been increased closer to 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 one. Having said that, this does not mean it is impossible to implement in a developing economy. Developing economies may have more variables affecting the viability of the implementation of a living wage and higher consequences 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 road map in place to guide milestones) can provide an opportunity for constant monitoring and evaluation of the process over time. This will limit the effect 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.

• Morton is executive director and Blair CEO at human resources consultants 21st Century.