Why Is Living Wage So Complex?

August 2, 2011
  • Roger McElrath portrait

    Roger McElrath

    Associate Director, Human Rights, BSR

Ever since the United Nations adopted its new human rights framework, companies have had an added impetus to ensure that the treatment of their employees, workers in supply chain partners, and people in local communities is just and in accordance with international standards.

One of the most direct ways that companies can do this for their own workers is through the terms of employment and workplace conditions, and arguably no aspect is more important than the level of remuneration or wages. For most workers in developed and developing countries alike, their wage is the predominant source of income for supporting themselves and family members. Indeed, the standard of living in many countries is determined largely by the level of wages workers receive, and ensuring that the wage level is adequate to support, at minimum, the purchase of basic necessities, should be a fundamental aspect of any company’s CSR efforts.

This is what is behind the concept of a living wage—that companies have a responsibility to compensate workers for their labor at a level that allows them to access goods and services that equate to a decent standard of living. But this seemingly straightforward concept is much more complicated when put into practice, and it starts at the most basic levels: What is a living wage, who is responsible for ensuring that it is defined, and what is the role of the company?

What is a Living Wage?

The concept of a living wage dates back to the beginning of the industrial revolution and the creation of wage-based economies. Even Henry Ford was concerned that his workers be compensated well enough to be able to afford the products his company was making. In its most basic form, a living wage allows an individual or family to purchase the goods and services necessary to support physical survival, i.e., food, shelter, and clothing. A more robust and meaningful definition includes those items that are considered customary to have at lower income levels in the particular society, such as transportation, education, health care, leisure, and savings.

Although many experts would agree that it’s best to frame the concept in terms of a market basket of goods and services, there is disagreement as to the inclusion of particular items. These disputes become more pointed when experts consider the applicability of a living wage across countries because the definition of what constitutes acceptable living standards is not only specific to the cultures of different countries, but also to their levels of economic development and the nature and provision of their social services. What constitutes a reasonable standard of living may vary by country, city, and even down to the family unit. Opinions also vary with respect to the most effective way to calculate and measure the value of these goods and services.

Who’s in Charge?

Governments have traditionally regulated wages through various measures, with the most important being the establishment of the minimum wage and, indirectly, poverty lines. Both of these are closely related to the concept of a living wage, but they are different in a number of important ways. To our knowledge, no government at the national level has specifically established a “living wage” that all employers must adhere to. In some countries, particularly among members of the OECD, minimum wage levels do equate to a living wage, but this is not the norm, and in many countries, minimum wage rates no longer provide realistic barometers of the income required to achieve a decent standard of living. One major exception has been in the United States, where more than 100 cities and counties have established living wages that typically apply to public sector employees as well as to contractors doing work for the government.

There is also little focus on living wage among multilateral institutions. The International Labour Organization (ILO), the world’s premier institution dealing with workers’ rights, does not specifically address the issue of living wages in any of its conventions or recommendations, and its Tripartite Declaration on Multinational Enterprises makes note only of the fact that companies should pay the “best possible wages that allow a good standard of living.”

The United Nation’s Universal Declaration on Human Rights does touch on the living wage concept in Article 23: “Everyone who works has the right to just and favorable remuneration ensuring . . . an existence worthy of human dignity.” But as with the ILO, there is no detail in terms of how to define or measure a living wage.

Since many standards covering labor issues make reference to the ILO as the principal source of guidance, it is not surprising that there is no internationally accepted definition of or methodology for measuring a living wage.

Contrary to the lack of action by governments and intergovernmental bodies, NGOs have given significant attention to the issue. Among the most prominent are Social Accountability International and the Ethical Trading Initiative. All of their standards have a living wage component, and SA8000, in particular, has a very rigorous framework for calculating a living wage.

What Should Companies Do?

As outlined here, there are a number of challenges related to implementing a living wage. First and foremost is the lack of a common definition that is applicable across countries and even within countries. There are also questions around how to measure the components of a living wage when taking a market basket approach to defining it. In addition, there is no governing authority at the national or international level that either defines or establishes a living wage, and related concepts like minimum wage are not useful substitutes in many countries.

For a business, setting the level of wages for a class of workers or a particular facility involves a complex set of internal and external issues, such as wage scales, productivity, competitive dynamics, and government regulation. As such, companies can be said to be wage “makers” (with significant power to set wages) and wage “takers” (with little power to set wages).

To the extent that a company has significant power to set wage levels, it can be assumed that there is a general interest in assuring that even the lowest-paid workers have the ability to purchase the basic necessities that constitute an acceptable standard of living in a given society. Workers that are impoverished do not make good employees, nor do they provide the basis for long-term competitive advantage. It’s recognized, of course, that there are exceptions in the form of companies that seek and/or impose subsistence-level wages. But this is not the rule across most companies, industries, and countries.

Given the lack of government direction on what constitutes a living wage, the question arises as to what responsibilities companies have to pay one, and how can they go about ensuring that they are doing so. Some companies, like Novartis and Starbucks, have incorporated a living wage component into their corporate citizenship standards, but they are the exceptions. Others have expressed concern that the complexity of calculating a living wage for multiple locations and countries is too difficult and impractical to implement.

In an upcoming edition of the Insight, we will explore steps that companies can take to ensure that their wage structure is in line with the principles of a living wage.

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