For and against the living wage

10/23/2024

Irja Rae, Figure Baltic Advisory leading partner

Many employers in Estonia are paying more and more attention to employee well-being. While there are many aspects to well-being, and financial aspects are certainly not the most important, financial security has a direct impact on our sense of well-being and our quality of life. In fact, it is the lack of money that has a direct impact - there are many studies that show that above a certain level of income, people are less and less motivated and happy when they get a salary increase. At the other end, however, scarcity of money can become a dominant preoccupation in a person's daily life, with no way of overcoming it or getting around it. While pay is not a fundamental component of our well-being, it becomes a central problem when people do not earn enough to live in a humane manner. 

The concept of living wage

Financial well-being is closely linked to wage, in fact to whether our wage is livable and fair. What is the living wage? This term refers to the minimum income needed to meet a person's basic needs. This includes things like shelter, food, transport, healthcare, education, but also other things that are necessary for a humane life - whether it's a gym membership, a theatre ticket or a book. This concept goes beyond the legal minimum wage, which is usually lower and may not be enough to cover all living costs. The calculation of living wage takes into account the cost of living and other living expenses in a given geographical area and aims to ensure that people can afford the basic necessities of life, but also a humane way of life.

There are both pros and cons to the living wage logic. It is fairly self-evident that if people earn a livable wage, this reduces poverty and creates a sense of economic security, which in turn strengthens stability in society. In addition, studies have shown that people earning a living wage have better health outcomes. And - last but not least - workers who earn a living wage are more motivated and productive. Critics, on the other hand, point first of all, of course, to the growing cost pressures on employers, especially smaller companies-organisations. This, in turn, can lead to higher prices for the consumer or a lower willingness to hire: trying to get by with fewer people in order to control cost increases. There is also the possibility that employers will make redundancies or cut working hours to control costs. In addition, paying living wages is quite difficult, as it is directly influenced by local conditions and economic circumstances - so the income gap between central areas and peripheral-rural ones, for example, could increase quite sharply. 

A humane life in the Estonia?

There are still many people in the Estonian labour market who earn less than a living income - around a third of workers earn less than this. According to Figure Baltic Advisory, the livable wage for a single person living alone in Tallinn last year was €1,614 per month and €2,269 per earning family member in a family of four, compared with €1,347 and €1,923 respectively elsewhere in Estonia. Unfortunately, 32% of Tallinners and 29% of the rest of Estonia surveyed in the Figure 2023 survey still earn less than this. 

Wage growth in Estonia has been quite strong in recent years, while inflation has also been very high in some places. Thus, people's real purchasing power has increased less than their salaries. People's courage to bargain over wages has increased, the systematicity of employers' pay policies has also improved year on year and the gender pay gap is on a downward trend. The Salary Transparency Directive, which obliges employers to disclose salary ranges for jobs, will soon come into force. This should make it even easier to ask for and receive fair pay.

S is also important                    

There has been a lot of talk over the last few years about the acronym ESG and the associated reporting obligations that larger companies will soon face. In this acronym, E stands for environment, S for social and G for governance. Basically, ESG means that a company's activities should take into account its impact, both negative and positive, on the environment and society, and that it should be managed transparently and fairly. 

Of course, in the context of the climate crisis, the ecological footprint of economic activity, or E, is receiving particular attention, as is the extent to which the direct and indirect environmental impact of its activities is addressed. S and G have received less attention. For the latter, the legislation sets out fairly clear expectations. S, on the other hand, is more ambiguous, and here it is perhaps more difficult for companies to understand what is expected of them or how to increase their positive impacts and reduce their negative ones. The most direct way to have a positive social footprint is through the well-being of a company's workforce, of which wages are the most important component. This is where we come full circle. 

While the needs of each individual, and hence their living wage, are different, employers can use statistically calculated average values of living wages and, where possible, base their pay policies on them. There are companies, both here and elsewhere, that are trying to shift wages closer to a living wage in the face of rising costs. However, there are still too few of them. I believe and hope that employers will recognise their social impact and that the move towards transparent, fair and systematic salary payments will be permanent and accelerating, leading to an increase in the number of people in the Estonian workforce earning a humane and fair wage.