Salaries and Exchange Rates: Defining your “real” worth

A while ago, I wrote about salaries. Specifically, about how some South Africans talk about the USD-value of their rand-denominated income. I mean, how often have you seen this sort of thing on twitter?

“In 2011, one USD would have set you back R6.50. Today, it would cost you R13. To stay constant in dollar terms, your salary should have doubled.”

So what can we say about it? Well, the statement is true. It is all fact, etc.

But the bigger question: is it interesting? Or relevant?

Other True Statements About Salaries

Here is a similarly factual statement that could have been made back in 2011:

“In 2001, one USD would have cost you R14. Today, it would cost you R6.50. To stay constant in dollar terms, your salary should have halved.”

How about that statement – is it interesting?

Here is another:

“In 2009, one litre of unleaded 95 petrol would have cost you about R6.50. Today, it would cost you just over R13.00. To stay constant in unleaded 95 petrol terms, your salary should have doubled.”

Also interesting?

Not really.

Salaries are measured against your daily purchasing power

What I’m trying to say is: there is no reason for a South African salary to keep rand-for-rand pace with changes in the cost of US dollars or the cost of fuel. Those changes affect part of our monthly expenses, not the full lot.

And if someone really want to earn a dollar salary, then they must emigrate to a place where they can earn US dollars. And it will almost certainly be a place where their expenses will be denominated in US dollars. Which would make sense – because currency is just a medium of exchange – and “earning an income” means “exchanging your services for the ability to buy other goods and services”, so it would be helpful if that medium of exchange were a common one.

An alternative viewpoint

If you’re still on the fence about that argument, allow me to rework that earlier statement:

“In 2011, one USD would have cost you R6.50. Today, it would cost you R13. To stay constant in dollar terms, your salary should have doubled, your grocery bill should have doubled, your rental should have doubled, and actually, everything should have doubled. But if those didn’t, and they all kind of kept up with inflation, then the only things that really doubled are the imported items in your shopping basket (if it wasn’t absorbed into the margins of the importers), and the cost of overseas holidays to anywhere that isn’t an emerging market holiday destination. Also, possibly fuel – but that is also influenced by the price of brent crude, so possibly not.”

Just as:

“In 2001, one USD would have cost you R14. Today, it would cost you R6.50. To stay constant in dollar terms, your salary should have halved, your grocery bill should have halved, your rental should have halved, and actually, everything should have halved. But if those didn’t, and they all kind of kept up with inflation, then the only things that really halved in cost are the imported items in your shopping basket (if it wasn’t absorbed into the margins of the importers), and the cost of overseas holidays to Europe and the US. Also, possibly fuel – but that is also influenced by the price of brent crude, so possibly not.”

For more on this sort of thing:

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.