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Leveling up on living wages to address inequality

Published: 19 Oct 2022
Author: Daan Wensing, CEO & Chair of the Executive Board, IDH
Type: Insight

The business case for paying a living wage is well-established. Better wages create a committed workforce, lower turnover, value chain resilience and improved reputation. There's a proven roadmap for turning this goal into reality for business leaders ready to level up to at least a living wage. With the support from, for example, the Business Commission to Tackle Inequality (BCTI) – a cross-sectoral and multi-stakeholder coalition of organizations that puts addressing inequality at the heart of business’s agenda for sustainable growth – we can mobilize the private sector to drive progress on this issue.

The global economy has been hit hard over the past three years. Just as supply chains began adapting to the pandemic, the Russian invasion of Ukraine and the burgeoning impacts of climate change have pushed the economy to the brink.

As we rebuild the global economy to confront the challenges we face, there is an opportunity to reconsider how business models can benefit wider society, break the cycle of inequality and strengthen business resilience. According to the International Labour Organization, there are 630 million people around the world earning less than USD$3.20 per day, which means they are working in poverty.

Companies have a vital role to play in creating an economy that supports decent livelihoods and sustainable growth; paying a living wage is critical. Research shared by BCTI shows that closing the living wage gap could contribute an additional USD$4.56 trillion in productivity and spending to global GDP every year.

A strong business argument complements the moral imperative for a living wage. Well-paid workers are integral to a profitable, sustainable and resilient business. There is an increasing unity in the call for better jobs among businesses, workers and the financial sector.

As Alan Jope, CEO of Unilever said in The Case for Living Wages: How paying living wages improves business performance and tackles poverty, “Capitalism is evolving to incentivize businesses to create better outcomes for more stakeholders. Living wages are an important part of this evolution.”

Unilever has committed to living wages for every worker in their supply chains. L’Oréal has extended a commitment to paying living wages for the employees to all of its strategic suppliers’ employees by 2030. They are just two examples of companies that are committing to the hard work of developing more resilient and just business models.

As they delve into the topic of living wages, these companies are discovering numerous benefits, including greater productivity, lower turnover, more substantial worker commitment and a better quality of life that contributes to stronger communities. Poverty wages no longer have a place.

Turning barriers into bridges

For many companies, the journey toward a living wage can seem daunting. Currently, just 4% of all companies have targets or commitments toward paying a living wage. Moreover, it’s clear that various real and perceived barriers hold some companies back.

Chief among these is the cost. Without a proper understanding of the actual costs of paying a living wage, its scale and scope can make it seem unattainable. 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 frequently cited include:

  • Price escalation – Costs can get out of control when each supply chain actor increases their price before goods move to the next step. Good business practices can mitigate or eliminate the impact, such as sharing responsibility among all supply chain actors.
  • Reaching scale – When an individual supplier sells to many companies, the effect of living wage contributions from an individual company is diluted unless every buyer commits to paying a living wage. 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.
  • The best method to deliver benefits – This is where a thorough understanding of the supply chain and trusted relationships come in. Suppliers and workers know how to best manage value distribution fairly and equitably and can work with partner buyers who want to ensure that extra value reaches the worker.   

And there are many more. Based on our experience, we have found that it is possible to turn these barriers into bridges with solid analysis, a deliberate approach and innovation.

Following a living wage roadmap

At IDH, one of our goals is to achieve strong, resilient businesses that fuel prosperity for millions of employed people. We created a Living Wage Roadmap, which 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 experience, we have identified five steps companies can take to transform their approach.

  • Identify the living wage – The first step in paying a living wage is to identify appropriate living wage levels in the regions where you work or source goods. To ensure a rigorous, consistent methodology, IDH has developed nine quality-based criteria that are common to credible benchmarks. Learn more with Benchmark Series or Benchmark Finder.
  • Measure the wage gap – The next step is comparing current wages with the living wage benchmark to understand the size of the wage gap. The Salary Matrix from IDH is a free tool that evaluates total remuneration received by employees and compares it to the relevant living wage benchmark. As of 2021, more than 188 organizations supplied data for 15 different products in 20 countries.
  • 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 living wage gap, you can begin exploring ways to close them.
  • 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, plus it usually takes a combination of interventions to close the living wage gap. Companies, including Fyffes, Hershey, L’Oreal, Mondelez, and Olam, have signed IDH’s Call to Action on Living Wages to not only take concrete steps to close wage gaps themselves but to encourage others to join the journey. Learn how you can sign on here.
  • Share learnings – Several companies are working towards paying a living wage. Sharing and learning from each other’s experiences creates a virtuous cycle that improves livelihoods and creates resilient businesses. In 2021, the IDH Living Wage Summit brought together more than 190 participants from 70 private sector companies and several governments. The 2022 Summit is planned for 7 December. Learn more here.

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

Learn more about IDH here.

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