Generating decent and empowering jobs is one of the most important societal roles business can play—a role that BSR believes is central to building an inclusive economy. However, a job in and of itself is not enough. A good job must ensure wages and benefits that allow employees and their families to have an adequate standard of living.

The subject of “living wage” is as relevant to developed markets as it is to developing ones. In his January 2014 State of the Union address, U.S. President Barack Obama called on Congress to raise the federal minimum wage, but he also asked U.S. business leaders not to wait for legislation to raise employees’ wages. Obama cited profitable companies like Costco that have already done so, minimizing employee turnover and maximizing employee productivity, commitment, and loyalty.

Since the address, several leading companies have followed suit in the United States and other developed markets. In February, Gap, Inc. launched its “Do More” initiative, which will increase the minimum wage for 65,000 of its U.S. employees. And in just the past few weeks, IKEA announced it would raise its U.S. workers’ pay to a living wage starting in 2015, and Nestlé became the first major manufacturer in the United Kingdom to achieve living wage accreditation.

These are all important steps toward building a more inclusive economy. A wage that enables people to meet their basic living needs is considered a universal human right. Yet millions, if not billions, of workers in both the developed and developing world struggle to attain enough income to access basic goods and services to take care of themselves and their families, let alone to live with dignity and participate meaningfully in the local and global economy. Living wages can create a healthy economic cycle, where people can purchase goods and services, improve their standard of living and potential for social mobility, and transcend poverty that has lasted for generations.

In August 2011, BSR’s Roger McElrath wrote a two-part series describing what constitutes a living wage, defining the role of a company in providing it, and outlining how a company can design and implement a living wage program. This approach remains relevant today and is backed up by developments in the past few years from leading companies.

Companies should follow five principles when addressing living wage issues:

  • Define "living wage." While raising the minimum wage is a good first step, it is different from a living wage. A living wage is socially defined (meaning, it varies by time and place) and is often linked to other social goals. Costco is a good example of a company that pays a living wage above the government-mandated minimum wage. 
  • Determine a calculation methodology. Companies should use a calculation methodology that is flexible across multiple regions or countries. Some companies may select a market-basket approach, which involves costing out the goods and services typically consumed in a particular area. Other companies may use a reference-based approach, informed by the poverty line and other measures. Some may mix the two approaches. And companies like IKEA have used independent initiatives, such as MIT’s Living Wage Calculator, which recommends location-specific, average wage rates.
  • Establish the scope of application. Companies should clarify who will be covered and how uniform or varied the living wage will be across the company. To broaden their impact, companies should also consider how they can positively influence workers’ wages in their supply chains. Marks & Spencer has committed to introducing mandatory reporting on a range of social metrics across its supply chains, including a living wage. The company also has developed a buying tool that accounts for a fair living wage when setting the cost price for products made by suppliers in Bangladesh, India, Sri Lanka, and other locations.
  • Engage key stakeholders. To ensure a successful program, companies should include their operating units in the design and review process. Novartis has used a consultation process to foster dialogue and improve understanding of issues faced by company affiliates at the national and local level, which has led to more accurate wage estimations and better buy-in to the program.
  • Develop a remediation process. When companies determine that worker pay is below the established living wage, they should create clear guidelines governing what the appropriate entity (such as division or foreign affiliate) must do to correct the situation.

I’m encouraged to see companies such as the Gap, IKEA, and Nestlé take steps to improve the livelihoods of their employees, who will in turn become more loyal and productive. Consumers may also take notice of this and reward these companies at checkout stands. And perhaps most importantly, these companies have helped bring the issue back into the limelight, which we hope will cause a ripple effect.

Read about BSR’s work on building an inclusive economy. We will also explore these issues in a dedicated session track at the BSR Conference 2014, in New York November 4-6.