Living wage: ethics and economics converge

No global supply chains consistently pay a living wage. While food prices and energy costs escalate, the issue of a living wage has become more important – and challenging – than ever, writes Deborah Leipziger

A living wage allows a worker to provide for their basic needs and those of their family; to purchase adequate food and clothing, access housing, clean water, transport, healthcare, education and childcare. Social Accountability 8000 defines a living wage as one that satisfies basic needs and provides for some discretionary spending. ‘Fair wage’ is a comprehensive term that takes into account other issues such as working hours and the local context.  

Whatever the definition, few issues are as controversial as a living wage. It is also difficult to calculate for many complex, interconnected reasons. To start with, a minimum wage does not provide a sustainable livelihood in many emerging economies. Hence, it may not be sufficient for companies to follow minimum or industry norms to provide for basic needs.

A living wage also needs to be addressed within a context. While wages may be low, benefits may be significant. If an employer provides food, transport and/or housing and medical care, then the wages they pay may be lower than at factories where employers provide no benefits. Where wages look high, there may also be significant barriers to entry. In some sectors, workers need to pay fees to find jobs but are then saddled with debts for years.

Understanding wage structures can be complex as there are many different practices in different regions. In parts of Latin America, workers receive a ‘thirteenth salary’ as a holiday bonus. The position is also constantly evolving: what counts as a living wage needs continuous scrutiny because of, for instance, the effects of inflation or currency devaluation. Also, by paying wages higher than the prevailing minimum, companies may reduce their competitiveness and financial sustainability.

Some trade unions object to NGOs and academics defining a living wage, believing the best scenario is for workers to set wages through collective bargaining. However, companies that fail to pay a living wage are more likely to restrict freedom of association. Setting wages is a political process that reflects the balance of power.  

Fair Trade USA’s Heather Franzese says wages and prices are often conflated. Brands may pay higher prices for goods when they source, but this will not automatically improve wages as suppliers may use capital to buy more raw materials or invest in plant.

While many companies have implemented codes of conduct, few specify a commitment to a living wage. Social standards such as Social Accountability 8000 and the Ethical Trading Initiative (ETI) Base Code require companies to pay a living wage for SA8000 certification or before becoming an ETI member.

A decade of codes and standards has improved workplace conditions though these have, for the most part, related to health and safety. To some extent, wages have been addressed through a closer review of how minimum wages correlate with basic needs, but the systematic payment of living wages remains elusive in global supply chains.

But two important initiatives have helped promote progress. The first is the Asia Floor Wage. Founded in 2009, it has set a floor on apparel sector wages. The calculation is based on a common analysis, but there are different calculations for each country.

The second is the Joint Initiative – the ‘Jo-In’ – which brings together several key campaigns to develop common approaches, including Social Accountability International, the ETI, the Fair Labor Association, the Clean Clothes Campaign, the Fair Wear Foundation, and the Worker Rights Consortium. Through a series of pilots in Turkey, the Jo-In has examined best practice.

Despite this, best practice is still emerging, though a number of companies and NGOs have developed useful approaches. For example, launched in late 2010, the Fair Trade USA pilot brings Fairtrade apparel and linens to the US market and is working to promote a living wage for workers in India, Liberia, Peru and Costa Rica. Workers earn a premium which they decide how to spend on items such as healthcare, housing, transport or higher take-home pay.

The Fairtrade premium amounts to between 1% and 10% of ‘freight on board’ (FOB) and is paid by brands to a worker-controlled fund. The pilot seeks to test the hypothesis that brands would need to pay an additional 6% on the FOB cost of a garment to fund a living wage and cover the cost of labour compliance.

All the pilot’s factories already pay above a minimum wage and are committed to continuous improvement, and will use the Jo-In Project wage ladder as a benchmark. Fair Trade USA is working with the Asia Floor Wage Alliance to create a benchmarking tool – at one factory in India, Fairtrade benefits over the first year equate to an additional week of earnings.

Another example is diamond manufacturer Rosy Blue, which runs cutting and polishing operations in many developing countries, including China and Thailand. Rosy Blue is committed to ‘going beyond the minimum regulations as stipulated by law’ when the minimum wage fails to meet basic needs. In 2006, it became the first Social Accountability 8000-certified diamond manufacturer.

The company first began to address wages with pilots in China and Thailand, and the lessons were promoted at sites in other regions. Its general manager in Thailand, Sookruthai Karintanaka, said: “We have to comply with national law, but we go beyond it. For example, the minimum wage here in Thailand is 153baht per day. At the minimum, we pay 215baht – 10% for discretionary income. As the legislation evolves, we will continue to revise our salary policy.”

Today, Rosy Blue pays 40% to 83% more than the Thai national minimum wage. Paying a living wage helps retain skilled workers, but it remains unclear how relevant Rosy Blue’s experience is for companies that produce cheaper goods.

In 2010, US college fashions supplier Knights Apparel began a $1m renovation of what was to become the Alta Gracia factory in the Dominican Republic. Alta Gracia pays its 120 staff a living wage and respects their rights, including freedom of association. It pays its workers more than three times the prevailing local minimum wage for trade zone workers.

The local minimum, at $147 a month, is not enough to feed and shelter a family. The Worker Rights Consortium has defined the region’s living wage, developed the labour code which Alta Gracia has adopted and verified compliance with the code. No other clothing factory in the developing world exporting to the US is paying a genuine living wage to all its workers on an all-year basis.

Knights Apparel CEO Joe Bozich said: “Transparency and independent verification are crucial. The actual living wage paid at Alta Gracia is publicly reported. The factory also has an independent and democratic union, which ensures workers are paid everything the company promised.” Paying a living wage adds approximately 20% to the total garment cost at the FOB price, according to Bozich.  

Meanwhile, UK food and clothing retailer Marks & Spencer has made a commitment to becoming the world’s most sustainable retailer by 2015, with the launch of Plan A. This includes a commitment to ‘fair partnership’.

M&S says that, by 2015, it will have processes in place that ensure its clothing suppliers can “pay workers a fair living wage in the least developed countries we source from, starting with Bangladesh, India and Sri Lanka. We will achieve this by ensuring the cost prices we pay our suppliers are adequate ... and by rolling out our ethical model factory programme.”

M&S, a party to the ETI, provides training to its ‘ethical model’ factories to increase productivity, which is in turn rewarded with higher wages. The training heralded productivity increases of between 25% and 61%, according to General Sewing Data. According to the BBC, wages have increased by at least 12% and, in some cases, by half.

In Bangladesh, no factory workers remain at the lowest pay level, absenteeism fell by 85% and staff turnover by 65%. Most (95%) of the workers also said harassment and abuse had significantly reduced. M&S said it took between seven and 12 weeks for the various factories to realise the productivity gains.   

It’s not clear how sustainable these examples of best practice are as, in many cases, they are the result of pilot projects or experiments. Will these factories be able to compete with employers who pay lower wages? Will consumers be prepared to pay higher prices for goods from companies like Knights Apparel?

Despite the questions, there are some pointers. Benchmarks, such as the Asia Floor Wage and the Jo-In wage ladder, are very helpful and provide transparency. For multinational companies, it is important to involve local management in decision-making. A key variable of success is leverage: if there is leverage, then the chance of success is greater than if the company only buys a small percentage of the supplier’s total production.   

Wage increases can be financed in any of three ways: via productivity increases, by charging consumers more, and by accepting modestly lower profit margin. In OECD or more developed countries, the living wage tends to fall between the minimum and the average wage.

M&S says it is important to involve workers in the process of determining a living wage as they are well aware of what levels need to be. Training workers and supervisors on how to increase productivity, and what the impacts will be, is also key.

It is important to track key performance indicators (KPIs) such as productivity, wages and absenteeism when implementing pilot programmes, and to collect good baseline data to understand the situation before taking action.

In 2009, Aviva sponsored a meeting of investors to discuss how they could engage with companies to promote a living wage. It concluded that investors do have  a role within a broader context of labour issues. However, the report warned that wage data provided to investors may be inaccurate.

Daniel Vaughan-Whitehead, of the International Labour Organisation, believes investors can help ensure transparency around wage issues by asking companies to take into account the 12 aspects of a fair wage. Investors can ask companies to set targets and report on progress around the payment of a living wage.

Deborah Leipziger advises UN agencies, governments and companies on CSR issues.

Aviva plc commissioned this research. The views and opinions expressed are those of the author and do not necessarily reflect the views of Aviva.