Understanding the concept of ‘living wage’

Bank Negara Malaysia (BNM) recently introduced the concept of Living Wage and it created quite a bit of confusion.

Functioning more as a guide on what is acceptable as minimum living standards, it is neither a minimum wage indicator nor a benchmark to assess poverty.

Below is an explanation on what Living Wage is and how it impacts us.

So what exactly is a living wage?

It is an income level needed for a household to be able to afford a minimum acceptable living standard, which consists of:

  • the ability to participate in society
  • the opportunity for personal and family development
  • freedom from severe financial stress

Sometimes, living wage is also described as fair wage or decent wage.

When Bank Negara speaks of a minimum acceptable standard of living, it goes beyond just being able to afford necessities such as food, clothing and shelter.

At the same time it should only reflect needs, not wants. It does not calculate the costs of different lifestyles or locations.

That around 40% of the Malaysians are living below the living wage does not mean that all hope is lost. Even in western countries such as the United Kingdom there is still around 25% of the population earning below the living wage.

There is no one specific standard for the living wage.

It is different with every country. In Canada the living wage also includes the possibility for healthy child development and in New Zealand it includes being able to live life in dignity.

Why is there a living wage?

Support for a definition of the living wage came about in the 18th century due to the low pay and bad working conditions of manual workers.

Recent calls for a living wage reflect renewed efforts to enable workers to afford a minimum acceptable standard of living, amid a large number of underpaid full-time workers seeking social assistance.

As economies started growing, there was an increasing amount of concentrated wealth in the hands of the highly educated. This resulted in income inequality and became one of the main reasons that motivated the need for a living wage framework.

Besides allowing employees to enjoy a minimum acceptable standard of living, the living wage could also cause a positive spill-over to the broader economy as it could lead to a lower employee turnover rate and improvements in employees’ morale and productivity.

Differences between living wage, minimum wage and aspirational income.

Living wage differs from minimum wage in several aspects. Living wage is not a requirement for the economy unlike minimum wage, which is enforced by law.

Second, living wage refers to a minimum acceptable standard of living, not just the existence of a minimum level of salary. Because of this, living wage is generally higher than minimum wage, especially as living costs increase. Lastly, the determination of living wage is based primarily on cost of living.

Living wage is meant to sustain the socially acceptable minimum standard of living, beyond the basic necessities like food, clothing and shelter.

Via BNM Working Paper – The Living Wage: Beyond Making Ends Meet by Eilyn Chong and Farina Adam Khong.

How living wage is calculated

An important part of developing living wage is estimating a wage level that represents the minimum acceptable living standards in a given area or region. There are multiple ways in which the living wage can be calculated.

First, determine whether there are large variations in price and living standards across locations and household alignments, which would give cause to create several estimates of a living wage.

The next step is to recognise the standards on basic needs, public feedback and data on household expenditure. As there is a diversity in households, different profiles need to be created in order to find out which items should be deemed necessities.

Depending on where someone lives, costs will be different. Look at things such as type of transport to work, eating out due to a hectic city life, at least one vacation per year, contributions to the Employees’ Provident Fund, etc.

This eventually gives rise to different brackets based on the different profiles as the example below shows.

Image: The Edge – http://www.theedgemarkets.com/article/state-nation-living-wage-new-benchmark-malaysia
Image: The Edge – http://www.theedgemarkets.com/article/state-nation-living-wage-new-benchmark-malaysia

What will be the impact of having a living wage in Malaysia?

Studies have shown that the living wage brings benefits to both employees and employers. However, the success of the living wage depends on several things. For example, it will be easier to pay a living wage during an economic boom compared to a financial crisis.

Moreover, the living wage can only be effective if it is set at a realistic and sustainable level.

As Malaysia starts to become a high-income nation, all parts of society should be able to reap the benefits. It is important that Malaysia overcomes the challenge of modest productivity growth and starts to strive for high-productivity and high-paying jobs that can afford the minimum acceptable living standard.

The living wage can be used as a guiding standard to inform, challenge and enhance policies. If the living wage becomes a success it can bring benefits to both employees and employers, with limited negative consequences on the economy.

The living wage has to be accompanied by greater productivity, and will require the collective effort of both employees and employers as well as the public sector.

This article first appeared in comparehero.my