Cost of labour vs cost of living

guest column:Emmanuel Zvada

It is not concealed that wherever the employees and employers go to the table to negotiate salaries, there is a vital logical point that gets raised nearly all the time by the employees and the question will be, “What about cost of living?”

The difference between “cost of living” and “cost of labour” is an absolutely critical one, particularly when it comes to compensation philosophy and compensation in organisations.

There is an increasingly significant disconnect between what Zimbabwean workers expect from their employers and what corporations are reasonably able to provide in a challenging economic environment.

What is cost of living and cost of labour
Cost of living refers to the amount of money required to maintain a standard of living, accounting for basics like housing, food, clothing, utilities, taxes and healthcare.

Increases or decreases in the price of these necessities affect the cost of maintaining your lifestyle, and this, in turn, shapes how well your income will support you and your dependants.

In other ways, the cost of maintaining a certain standard of living is what we call cost of living.

When the wages you pay keep up with living expenses, employees are not forced to look elsewhere for higher paying work.

Cost of labour reflects what a particular geographic market offers as compensation for a specific type of work. This in usually termed salary.

In some instances, “Cost of labour” refers to the difference in pay or labour market for a job from one location to another.

The difference between the cost of labour and cost of living can mean many different things to many people.

In total rewards, it is important to address how cost of labour and cost of living are applied in our profession and business.

The current situation

According to the Zimbabwe National Statistics Agency (ZimStat), the poverty datum line represents the cost of a given standard of living that must be attained if a person is deemed not to be poor’.

The poverty line is obtained by specifying a consumption bundle considered adequate for basic consumption needs and then estimate the cost of these basic needs.

The poverty line may, therefore, be defined of as the minimum expenditure required by an individual to fulfil his or her basic food and non-food needs.

Runaway inflation has driven the majority of Zimbabweans below the PDL as many of those formally employed are earning less than $1 500 per month.

The total consumption poverty line (TCPL) for an average of five persons stood at $3 159,52 in October 2019.

This means that an average household required that much to purchase both food and non-food items for them not to be deemed poor, of which they cannot afford.

Inflation causes cost of living expenses to regularly increase. As the price of everyday items such as food, housing, gas, clothing, and utilities rises, your employees spend more.

To remain in a consistent financial situation, employee wages must go up as living expenses go up.

Cost of labour overtaken by the minimum cost of living

The current situation is dire and everyone knows that most employees and some employers as well are severely incapacitated and we are facing an existential crisis, a real crisis of existence.

It is very crucial to highlight that currently the cost of labour seems to be unfair as it is lagging behind the cost of living.

In actual fact, when normal cost of living has overtaken the cost of labour, employees are affected more as they will be left incapacitated.

Expectations vs reality

There is a widening gap between employee expectations and the reality of what organisations can reasonably offer them, which could prove toxic to companies if left unaddressed.

Zimbabwean employers need to make the connection between actions, outcomes and rewards clear in the context of business performance.

Organisations must put their communication strategies around pay to ensure they are having the desired impact.

It is important that employees are rewarded for their hard work and loyalty.

Restructure the wage system

A cost-of-living raise is an increase in pay that is intended to keep the buying power of an employee’s salary the same during a period of inflation.

Without a cost-of-living raise, the declining value of the dollar would leave workers with less real money in their pockets.

Employee remuneration has been eroded. It is known that at this stage most employees are struggling to make ends meet given the devaluation of their salaries and rising inflation.

The increase in inflation has impacted on how employers structure their remuneration.

To tackle cost of living pressures and maintain sustainability of remuneration, it may be necessary to look at the following options.

Linking wages to productivity

By directly linking wages with productivity, the employee is continuously rewarded for hard work, which drives him to produce more profits for the business.

The relationship between productivity and wages is a central issue for fair distribution between labour and capital.

Productivity can be defined as the amount of goods and services (output) produced in the economy for every unit of labour.

For example, output per worker and output per hour of work are both productivity measures.

When output per worker increases, workers’ contributions to the firm’s revenue increases causing demand for workers to increase also.

NEC pay structures to be continuously reviewed

The institutional wage negotiation setting in the private sector (NECs) through overall good, their role has been relegated to once-off wage negotiations.

It is critical that the role of the NECs be realigned so that they also consider their main role of representing the workers.

Key business decisions may occasionally require consideration of both cost of labour and cost of living in the analysis.

If companies haven’t effectively realigned employee expectations around compensation, workers will harbour bad feelings about how they are recognised and rewarded.

They may simply choose to “quit in seat”.

When they decide to quit in seat it means they will be coming to work, but disengaged and that has a great danger of compromising the performance of the organisation.