Living Income: Integrating Fair Pay in Business Models and Global Supply Chains

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100 years after the International Labour Organization (ILO) Constitution stated that “peace and harmony in the world requires an adequate living wage,” and over 70 years after the United Nations General Assembly declared a “just and favourable remuneration” a human right, low incomes and poverty wages still affect too many workers across global industries.

Some 700 million workers lived in extreme or moderate poverty in 2018 on less than US$3.20 per day. Workers and farmers in global supply chains should earn enough income to afford a decent standard of living for themselves and their families — including food, water, housing, education, healthcare, transportation, clothing and other essential needs.

Some 700 million workers lived in extreme or moderate poverty in 2018 on less than US$3.20 per day.

A challenge and responsibility for global companies

A recent Oxfam report shows that poor pay and punitive working conditions are common on farms and plantations that supply fresh fruit from Brazil or tea from India to major UK supermarkets including Lidl, Aldi, Sainsbury’s, Tesco and Morrisons. The Sheffield Political Economy Institute has found that low pay continues to be the status quo in the garment industry as well, despite increasing public commitments by global fashion brands. In the UK, more than five million people suffer low-paid, insecure work, leaving families struggling to make ends meet. In the US, the federal minimum wage of $7.25 an hour is well below the poverty line for a full-time worker and has not increased for over 12 years.

Although many countries have set a legal national minimum wage for workers, minimum wages do not systematically cover all workers, and most importantly, they often fall far short of what many estimate to be a living wage. Peter McAllister, Executive Director of the Ethical Trading Initiative, believes that living incomes should be built into pricing mechanisms in global value chains and companies need to recognize the benefits of doing so:

“Companies tend to focus on compliance with minimum wages in their supply chains, rather than realising that it is in their own long-term self-interest that workers’ income increases in a predictable, systematic way. The alternative is high worker turnover, loss of skills and experience and in the worst case, civil unrest.”

 The business case for him is strong, as are the risks to society of inaction:

“Showing leadership in calling for effective wage setting mechanisms would not only improve business outcomes by driving productivity and efficiency, but also make a wider contribution to the SDGs and local development. If global supply chains are built on unsustainable incomes, we contribute to a looming crisis.”

Although many countries have set a legal national minimum wage for workers, minimum wages do not systematically cover all workers, and most importantly, they often fall far short of what many estimate to be a living wage.

Progress made

The concepts of a living wage and living income — both of which are about achieving a decent standard of living for households, but one applies to hired workers and the other encompasses more broadly any income earner, such as farmers — have been gaining momentum over recent years.

In 2011, a thorough definition and methodology for estimating a living wage (or income) was established by researcher Richard Anker. The Anker Methodology has served as the basis for over 30 country benchmark reports that helped reach consensus on the living wage gap. Achieving alignment on what a living wage or income is and how it can be measured is a significant step towards securing it for all workers.

The 2011 revision of the OECD Guidelines for Multinational Enterprises integrated the concept of living wages in multiple ways, for example urging multinational companies to provide the best possible wages, benefits and conditions of work when operating in developing countries, adding that these should be “at least adequate to satisfy the basic needs of the workers and their families” in Chapter V on Employment and Industrial Relations.

Achieving alignment on what a living wage or income is and how it can be measured is a significant step towards securing it for all workers.

Over recent years, a number of well-known brands have integrated the concept of a fair wage in their sustainability strategies. In 2013, H&M was among the first companies to design a roadmap towards living wages in its supply chains, its Fair Living Wage Roadmap. Unilever’s Framework for Fair Compensation, established in 2014, fights against sources of wage discrimination, notably by gender, and includes a worldwide commitment to paying living wages to all employees by 2020. Through its Responsible Sourcing Policy, the company aims to extend the concepts of the framework beyond its direct employees to its entire supply chain. After conducting a series of fair wage assessments among suppliers across various markets in collaboration with the Fair Wage Network, IKEA also started to work towards closing the gaps identified. For example, in the US in 2014, the company used MIT’s Living Wage Calculator and raised the wage floor in the country to $10.76 an hour; in 2016, IKEA UK started paying a living wage to all employees. AstraZeneca has also committed to paying a living wage in all its markets.

Leading sustainability standards organisations, including Fairtrade International, Rainforest Alliance/UTZ and Social Accountability International (SAI) have joined the Global Living Wage Coalition (GLWC) to support the creation of further benchmarks and drive progress at a global scale. 

Defining the right approach to address the living income gap

The examples above show steps in the right direction, but this progress needs to cover much larger numbers of workers.

According to Carla Romeu Dalmau, Senior Advisor at the Sustainable Trade Initiative (IDH), three conditions need to be united for a company to be able to effectively work towards addressing the living wage gap in its supply chain: (1) the company has a substantial leverage in its supply chains, (2) the living wage gap is relatively small, and (3) there is a good enabling environment (e.g. there are wage-setting mechanisms like Collective Bargaining Agreements in place).

Says Carla Romeu Dalmau: “If these criteria are not fulfilled, a coalition setting tends to be more advisable — involving other companies, governments, neutral stakeholders and NGOs.”

Examples of such coalitions have started to develop. Multi-stakeholder initiative Fair Wear Foundation (FWF) has been working closely with 130 member brands for a fairer and more ethical fashion industry. The Foundation engages with factories, trade unions, NGOs and governments across Asia, Europe and Africa to remove barriers to a living wage. To gain insight into its member brands’ performance, FWF conducts checks at three levels: (1) at the brand level, to see which current business practices and management decisions are likely to create problems down the line and which are helping support better labor conditions; (2) at the factories, to inspect working conditions; and (3) by hearing directly from the garment workers.

In 2014, IDH convened the first supply chain coalition to close the living wage gap while revitalizing the tea industry in Malawi, known as the Malawi Tea 2020 partnership. Through a collaboration between stakeholders from across the entire tea value chain (including buyers , traders, packers, retailers, IDH, development organisations, certification schemes, civil society actors and trade unions in the sector), the program is fostering a more competitive and profitable Malawi tea industry where workers earn a living wage and smallholders a living income, and where women and men work in healthy and fair working conditions. Since the beginning of the program, the net living wage gap has decreased by 25% and workers on tea plantations in Malawi now get 40% more than the country’s minimum wage. In its 2018 Annual Report, IDH shared that one challenge they faced was the income tax threshold in Malawi: when wages were raised thanks to the Malawi Tea 2020 program, tea workers risked falling into the next income tax bracket, which would mean that the increase of wages wouldn’t translate into higher salaries for the workers. This shows the clear need for government involvement and policy alignment in support of living wages.

Over the last five years, IDH has developed other programs to address living wages and working conditions in various supply chains, including bananas, flowers, and apparel, through its Race to the Top program. These living wage programs focus on more than one producing country, because as Carla Romeu Dalmau highlights, “in order to create a level playing field, and to preserve the competitiveness of the industry, it is important to work in more than one producing country at a time.” The next phase of the Malawi Tea partnership will therefore further involve other East African countries. In bananas, IDH has just announced the first retail commitment to close the living wage gap by 75% for their entire banana assortment. To support companies,  IDH will publish a video presenting this and other lessons learned.

Although global extreme poverty is decreasing, its decline has slowed down, raising concerns about our ability to achieve the goal of ending poverty by 2030. Income inequality has been rising dramatically in most countries, and it is closely connected to rising crime and unrest. The World Inequality Report 2018 highlights that if rising inequality is not properly monitored and addressed, it can lead to “various sorts of political, economic and social catastrophes.” As shown by the Edelman Trust Barometer 2019, only one in five people believe the system is working for them, and over 70% share a sense of injustice and a desire for change.

The World Inequality Report 2018 highlights that if rising inequality is not properly monitored and addressed, it can lead to “various sorts of political, economic and social catastrophes.”

In a context of rising inequality, political instability and civil unrest, the growing momentum around living wages highlights the need for bold action from all stakeholders, including the business community, who is increasingly expected to step up to the challenge of addressing societal challenges as trust in national governments flounders. Addressing the living wage/income gap will likely determine a company’s license to operate in global supply chains. Corporates that depend on unsustainable incomes in the supply chains will struggle to thrive in the future as the risks of inaction start to manifest in society.

About the author

Sabrina Gonçalves-Krebsbach
Sabrina Gonçalves-Krebsbach

Sabrina is a Manager in SustainAbility's London office. She works across a range sectors to help businesses advance sustainability.

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