Latest Research Shows: Living Wages are the Tipping Point for Attaining a Decent Life

Economist Martin Kahanec and his team of researchers at CELSI and WageIndicator are on a mission to prove whether paying a living wage indeed affords workers a decent life. Their latest findings show positive results. The research was recently presented at the global conference on Decent Work and Corporate Social Responsibility in the Era of SDGs organised by WageIndicator and the FLAME University in Pune India. WageIndicator had the opportunity to interview Dr. Kahanec to delve deeper into their research.

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Why should people care about paying/receiving a living wage?

The concept of living wages aims to ensure that workers earn enough to sustain a decent standard of living for their households. The goal is to accurately assess the expenses required for such a standard of living and to do so consistently on a global scale. By analysing the costs of a basket of goods and services across approximately 170 countries and 1,500 regions, we can determine the appropriate level of wages for different types of households.

This endeavor is significant for several reasons. Primarily, it addresses both moral and economic concerns. Morally, there is a belief that individuals should earn enough to support themselves and their families adequately. Economically and socially, evidence suggests that ensuring living wages has positive outcomes. For instance, it enables individuals to lead healthier lives, provide better education for their children, and escape poverty. Our global analysis reveals that while minimum wages may be adequate in a few affluent countries, they often fall short in many regions, particularly in the global South but also in some areas of the global North.

When relying solely on the statutory minimum wage mandated by central authorities in certain countries, it's important to recognise that these wages are usually determined through political processes rather than data-driven assessments. While some data may inform these decisions to an extent, they primarily reflect political considerations rather than a thorough understanding of the actual cost of living. Consequently, these minimum wages tend to be lower and often fail to meet the necessary threshold for sustaining a decent standard of living for households.

There’s a belief that the implementation of living wages will increase costs for a company, cutting short their revenue. What do you think about that?

For employers hesitant about raising wages due to concerns about resources and profitability, there is an alternate perspective to consider. Evidence suggests that paying living wages correlates with increased innovation and human capital development within companies. Rather than letting go of employees who were previously not within the living wage bracket, companies invest in their skills and technology, resulting in enhanced productivity and innovation.

While adjusting to higher wages may take time, evidence indicates that it doesn't necessarily spell disaster for employers. Through innovation and technological advancements, they can increase productivity in a manner that maintains profitability. Therefore, they have the capacity to adapt to the higher wage standards effectively.

What are some other benefits of implementing a living wage for companies?

Initially, when you propose a significant wage increase to managers, they may react with skepticism or resistance, thinking it's unfeasible. However, upon further discussion about their long-term sustainability strategies, they begin to realize several key points.

Firstly, stakeholders expect companies to act ethically in the labor market by paying decent wages. Adhering to living wage standards reduces their risks of reputational damage in case of labor disputes or accusations of being a poor employer. By having a standardised reference point, they can defend their practices and mitigate reputational risks.

Moreover, in the long run, paying living wages provides a competitive advantage. Being perceived as a good employer attracts talented individuals who scrutinise companies based on their treatment of workers and working conditions. This attractiveness extends not only to lower-level workers but also to managerial positions. 

Additionally, in many countries, being a decent employer is a prerequisite for accessing certain markets. For instance, public procurement processes often favor vendors who demonstrate a commitment to fair wages. By showcasing a plan to implement or approach living wages, companies can enhance their eligibility for lucrative contracts and partnerships.

What makes your present research on living wages unique? 

Essentially, we're delving into what sets living wages apart and whether they truly reflect decent living standards. Initially, we questioned whether living wages accurately correlate with decent living. To explore this, we examined 44 countries and seven occupational groups, comparing average wages with the living wage benchmark. This comparison essentially measures how many "living wage baskets" an average salary in a given occupation can afford. Interestingly, we found that occupations with higher earnings relative to the living wage tended to correlate with lower risks of material deprivation and dissatisfaction with working conditions.

However, we didn't stop there. We sought to compare living wages to existing minimum wage standards. Our analysis revealed a significant finding: living wages exhibit a much stronger association with people's overall happiness and material well-being than minimum wages do. This underscores the relevance and efficacy of living wages in promoting decent living.

Furthermore, we're currently investigating another intriguing aspect: the steepness of the relationship between living wages and material deprivation. Preliminary findings suggest that below the living wage threshold, increasing wages has a substantial impact on reducing material deprivation and enhancing life satisfaction. However, beyond this threshold, the effect diminishes, indicating a point of diminishing returns in terms of financial well-being.

While these findings are promising, they are still in the early stages of analysis. Yet, they offer compelling insights into the efficacy of living wages in promoting decent living standards. 

So would it be fair to assume that implementing a living has the highest impact on those earning the least? 

Indeed, when we consider all occupations, including high-skilled ones, we observe some impact of living wages, as I mentioned earlier. However, this impact becomes significantly more pronounced when we focus solely on low-skilled occupations. This observation aligns with expectations because high-skilled occupations typically command salaries well above the living wage threshold. Consequently, the effect of living wages on these occupations is relatively modest since they've surpassed the tipping point we discussed earlier. While living wages still have some influence in these cases, it's not as substantial.

Conversely, the effect of living wages is notably potent for low-skilled occupations. This finding bolsters our argument that living wages are particularly crucial for low-income groups, as these individuals are often on the cusp of earning wages that align with the living wage standard.

The research is currently in the process of being published. Until then, you can access Dr. Kahanec’s presentation here, and to learn more about the living wage, read more here.

April, 2024