How businesses can achieve living wages with surprising benefits

This opinion piece was first published at the World Economic Forum: www.weforum.org/agenda/2022/07/how-businesses-can-start-implementing-the-living-wage-and-its-surprising-benefits/ 

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Quick Summary

• Growing disparities in income and wealth are leaving people behind.
• This inequality threatens not just livelihoods, but the development cycle and social fabric of societies.
• Companies have the tools to reduce inequality and build more resilient value chains.
• A focus on living wage has concrete benefits for both workers and business.

 

Inequality is a threat to global stability. As the gap between rich and poor increases, it threatens the viability of the global economy. Companies and the financial sector have a vital role to play in creating an economy that supports decent livelihoods and sustainable development, and better wages are a big part of the equation.

According to the OECD, the average income among the richest 10% of the population is nine times higher than that of the poorest 10%. Rising food and energy costs, global conflict and the continuing fallout from the COVID pandemic only exacerbate the problem.

At IDH, one of our goals is to achieve strong, resilient businesses that fuel prosperity for millions of employed people. When companies delve into the topic of living wages, they quickly find a number of potential benefits, next to the moral imperative: greater productivity, lower turnover, stronger worker commitment, and a better quality of life that contributes to stronger communities.

Turning Barriers into Bridges

As we rebuild the global economy to confront the challenges we face, there is a need to reconsider how business models can benefit wider society, break the cycle of poverty, and strengthen business fundamentals. There is an increasing unity in the call for better jobs among businesses, workers, governments and the financial sector. But more needs to be done, urgently and at scale.

The governments of the Netherlands, Germany and Belgium agreed on a joint declaration regarding living wage and income. Unilever, for example, has committed to living wages for every worker in their supply chain. L’Oréal has extended a commitment to paying living wages for the employees to all of its strategic suppliers’ employees by 2030. Companies have realized how the moral imperative for a living wage complements the business argument. Well-paid workers are an integral part of a profitable, sustainable and resilient business. Poverty wages no longer have a place.

Well-paid workers are an integral part of a profitable, sustainable and resilient business. Poverty wages no longer have a place.

For companies that have yet to explore the living wage concept, the journey can seem daunting. At the moment, just 4 percent of all companies have targets or commitments towards paying a living wage. It’s clear that there are numerous barriers that give companies pause, some of them real and some of them perceived.

Chief among these is the cost. Without a true understanding of the true costs of paying a living wage, the scale and scope of it can make it appear impossible. A firm grasp on the numbers and the size of the gap between current wages and a living wage is crucial for making the seemingly impossible attainable.

Beyond the cost, other barriers we frequently hear include:

• Price escalation –Good business practices, such as sharing responsibility among all supply chain actors, can mitigate or eliminate the impact.
• Limited impact of living wage support – When a supplier sells to many companies, unless every buyer is committed to a living wage, the impact from committed companies can be limited. Achieving a living wage for workers across a supply chain requires strong relationships and a commitment to building the case for action among other buyers.
• How to best deliver benefits – This is where a thorough understanding of the supply chain comes in. Suppliers and workers know how to best manage the distribution of funds in a fair and equitable way. Good companies rely on trusted relationships with their suppliers, yet verify and confirm delivery, to ensure proper distribution of funds.

Best to follow a roadmap

We have found that it is possible to turn these barriers into bridges. The IDH Living Wage Roadmap provides a useful framework and the necessary tools to guide you through the living wage journey.

The Roadmap was developed in partnership with brands, retailers, suppliers, and sustainability organizations, including civil society and standards setters. Through our research, we have identified five steps that companies can take in transforming their approach.

1. Identify the Living Wage

   The first step is identifying the living wage levels in the regions where you are working or sourcing. There are numerous resources for finding appropriate wage benchmarks. Find different ways to establish a reliable, credible benchmark using the Benchmark Series or Benchmark Finder in our Roadmap.

2. Measure the Wage Gap

   The next step is comparing current wages with the benchmark to understand the size of the wage gap. The Salary Matrix is a tool that evaluates total remuneration received by employees and compares it to the relevant living wage benchmarks.

3. Verify calculation of living wage gaps 

   Verifying the data and information gathered is critical for building trust among management, employees and other stakeholders. With a clear understanding of the wage gap, you can begin exploring ways to close them.

4. Close living wage gaps 

   There are four main areas to consider in closing wage gaps: facility performance, employment practices, procurement practices, and the wider enabling environment (e.g. level of social safety net, access to additional support, social dialogue). Understanding how these areas contribute to wages and identifying where there are deficiencies can point you in the right direction.

5. Share learnings 

   There are more companies working towards paying a living wage. Sharing and learning from their experiences – or sharing your own – creates a virtuous cycle that improves livelihoods and creates resilient businesses.

Barriers to living wages differ among value chain actors, but the common thread to achieving them lies in collaboration. We can only achieve a living wage when every partner assumes their responsibility. Together, we can and must build a better, more resilient global economy that supports decent livelihoods. Learn more about how companies are working individually and collaboratively to make progress on living wages in global supply chains.