Raising wages: an urgent imperative

A wage that's enough to meet basic needs and to provide some discretionary income - why is this still elusive for so many workers?

Living wage guidance and resources

In the past decade, retailers and brands have made some progress in getting their suppliers to pay their workers their statutory entitlements - in other words, the prevailing minimum wage plus any pension contributions, sickness or holiday pay they are entitled to.

But in many countries, government-set minimum wages fall far short of what many estimate to be a living wage.

The reality is that the vast majority of the people in emerging economies making the products we consume struggle to survive on wages that are barely enough to cover their daily subsistence needs.

Consequently, living wage continues to be a challenging issue for ETI and its members. The past few years have seen a rise in interest in the issue of wages from a range of stakeholders including consumers, the media and, not least, workers themselves. We have seen some important developments in thinking on the issue, and a number of valuable new reports have been published. Wages in many global supply chains have come under pressure and at the same time we have seen sometimes dramatic efforts by workers to have their voice heard in demanding better wages; in South Africa, Bangladesh and Cambodia for example. However the issue is not confined soley to emerging economies.

Professor Bain [the chief architect of minimum wage in the UK] said recently:

“In the early years of the minimum wage, we were successful in tackling some of the worst excesses of low pay and exploitation. This was our number one priority. The challenge for the next 15 years is much harder - how to help people earning above the minimum wage but below the living wage. Yet on current forecasts it looks like the gap between the minimum wage and the living wage could only widen in the coming years. Fresh thinking is going to be needed.”

Many ETI members have been working to improve wages in their supply chains or to lobby for the improvement of wages in sourcing countries. ETI is supporting them in sharing what they are learning from this practical experience, so that we can work together towards significant improvements in wages for workers worldwide – and ultimately towards a living wage for all.

"It's important that companies don't allow the challenge of how to calculate a living wage to distract them from getting on with raising wages. In many countries the minimum wage falls so far below any living wage estimations that even significant increases in pay are unlikely to exceed a living wage."

Frequently asked questions

(including Guidance on the UKs new "National Living Wage")

What is a ‘living wage'?

ETI Base Code clause 5 describes a living wage as “enough to meet basic needs and to provide some discretionary income.”  

Other standards highlight that wages should be enough to support a worker and his or her family.

SAI breaks down “basic needs” into: “a standard level of nutrition, housing, transportation, energy, healthcare, childcare, education and savings within regulated working hours (eg without overtime hours).”

Why is living wage important?

Because minimum wage rates fail workers at the lowest end of the pay scale and even where established are often not met.

Without a living wage workers may be compelled to

• work excessive overtime hours or multiple jobs
• become bonded labourers
• put their children into work instead of school
• be denied their basic human rights to food, shelter, nutrition, health, housing and education and suffer social deprivations such as being unable to take part in cultural events
• be unable to withstand crises such as ill health.

Because there is a strong business case. Workers on living wages are likely to be

• more productive – because they are better motivated
• less likely to leave – reduced attrition means lower recruitment and training costs
• healthier – reducing loss of working hours due to sickness.

Brand reputation will also be enhanced; customers are increasingly sensitised to the working conditions of those that make the products they buy.

Because it can reduce government spending. Workers on low wages have to rely on benefit payments to survive. If they received a living wage, governments could cut benefit spending.

How does living wage differ from minimum wage?

A minimum wage is a national floor level set by the government.

Many countries have set a legal national minimum wage for workers. It is usually agreed through negotiations between government, industry and sometimes trade unions. However this mechanism does not always work as intended; there is sometimes no real representation of workers, or the mechanism is used only sporadically, or ignored in the reality of the workplace.

A living wage is what workers need to provide their families with decent standards of living

The national minimum wage in many countries is often not sufficient to enable a worker to provide his or her family with a decent living standard; ie, provide basic needs and allow some discretionary income for emergencies etc.

Living wage proponents argue that making the minimum wage equivalent to the living wage means that companies would be paying in wages what the government has been paying in benefits. Some describe this as a ‘living minimum wage’.

Why is living wage rising on the global agenda?

• The rising phenomenon of “the working poor” since the 2008 recession – ie working people who are unable to make ends meet because wages are too low.
• The gap between national minimum wages and cost of living increasing
• The growing awareness and concern of consumers about working conditions (heightened further by incidents such as the Rana Plaza collapse)
• The continued development of international standards for business and ethics.

What are the challenges to achieving living wages?

• Wage levels come about through a complex economic process of labour supply and demand, through negotiations, established policy norms, the power relations between workers and employers etc. Artificially setting wages may be impracticable or may lead to unintended consequences.
• If overall budgets are not increased, increasing wages for some workers could lead to others being laid off or not recruited – ie increased unemployment
• Lower skilled workers, may be priced out of the job market because the value they add is not seen to be equivalent to the new higher level of wages
• Companies may be unwilling or unable individually to increase the prices they pay to suppliers for products
• In a top down approach, if higher prices are paid, suppliers may not pass price increases on to workers, particularly if workers have no bargaining power.

What can brands and retailers do?

It is important for companies to look beyond definitions and calculation methodologies and to think about inclusive mechanisms that ensure that a living wage is a product of a process of negotiation which is able to respond to externalities over time, and how this is accommodated in the value chain. As part of this process it is vital to consider the particular rate of pay in a particular location and industry. Companies should:

• Build long term, mutually trusting relationshipswith suppliers and work together to understand the drivers of prevailing wage levels and how they can be influenced
• Consult with workers/managers to calculate living wage levels for the area/industry*
• Advocate for mechanisms to set national minimum wages that equate to living wages
• Ensure cost of living wages are accommodated throughout the value chain and if necessary in product price
• Improve workers’ collective bargaining power and ensure their right to freedom of association is respected.
• Incentivise employers to pay living wages – eg by increasing orders to those suppliers.
• Improve productivity and efficiency to enable the value chain to accommodate wage growth.
• Mitigate the impact of wage increases on unemployment or other unintended consequences in your supply chains.
• Join forces with other ETI members, companies, NGOs and trade unions, to share lessons on working towards living wages.
• All of the above!

*Some work has already been undertaken to establish a living wage figure in specific industries and locations. However it is probably more useful and sustainable to ensure robust mechanisms and frameworks are in place that allow for these informed negotiations to happen on a regular basis between employers and workers. In many countries, and certainly those where many brands source their products, wages fall far below any interpretation of a living wage, so whether or not an exact figure has been calculated, it is worth seeking ways to ensure that workers can improve their wages.

Guidance for UK companies on the "National Living Wage" and how this relates to the living wage:

In the UK's Summer 2015 budget it was announced that: “From April 2016, a new National Living Wage of £7.20 an hour for the over 25s will be introduced. This will rise to over £9 an hour by 2020”. This rate has been calculated by the Low Pay Commission. We know that many UK employers will have questions about this new increased minimum wage level, the government’s plans to enforce the new rate and how this will affect your companies/organisations and your suppliers. We have put together some answers to help with understanding this.

Will companies paying the new “National Living Wage” be complying with the ETI Base Code clause on living wages?

No. Living wage is a term with a specific meaning that is well understood internationally. Enshrined in the ETI Base Code of labour practice, living wage is “enough to meet basic needs and to provide some discretionary income”. In the UK the term has been further defined under the auspices of the Living Wage Foundation, which adopts a rigorous calculation methodology, informed by multi-stakeholder focus groups. It has established the level which best “affords people the opportunity to provide for themselves and their families” in London (currently £9.15 an hour) and the rest of the UK (currently £7.85). So the UK’s new "national living wage" of £7.20 per hour from April next year (for over 25s), is not in fact a living wage. UK employers wishing to pay their staff a living wage should use the figures provided by the Living Wage Foundation. In the first instance employers should be encouraging freedom of association and collective bargaining to ensure that wages are set at a level that is agreed by both workers and their employers. This should include adjustment of wages to maintain existing reasonable differentials between different pay grades.

Will paying under 25 year olds less than the National Living Wage for the same work constitute discrimination?

Yes. Although it will be legal to pay workers different amounts for the same work when the new rate comes in, this would constitute discrimination according to the ETI Base Code. This is what one of our trade union members, the TUC, has to say on the subject: “The TUC has argued that concept of “the rate for the job” should apply to the NMW, and that the 18-21 year old rate should thus be phased up to the full adult amount in order to avoid unfair age discrimination... Another question concerns the behavioural effects that the new rate will have around the boundary between under and over 25s. One issue is that younger workers who see older colleagues getting paid more for the same job may tend to become demoralised and thus less productive.” (Touchstone, 08 July 2015)

Will ETI companies in the supply chains of members be expected to pay 125% overtime premium of the new standard rate when it comes into force?

Yes. If there is a contractual agreement with workers that they will receive a premium rate for overtime then this must be respected. In line with ILO conventions, the overtime premium is recommended to be at least 125% of the standard rate of payment.

How do we support adoption of this new national minimum wage in our supply chains?

Progress towards a living wage in ETI member supply chains is a long standing commitment, however we recognise that for those employers currently paying significantly lower than the new rate the extent of the increase and the short timescale provided will present challenges. As with any other cost increases such as raw material costs, or indeed reductions such as fuel costs, the value chain as a whole will have to adjust. It may be possible to accommodate these increases out of existing margins, or through increased productivity and efficiency, it may be however that the value chain as a whole from primary producer to consumer needs to accommodate such changes. We would caution that suppliers are not left to manage this change on their own at the risk of unintended consequences, such as increased quotas for production, or reduced benefits. We would expect our members to take a mature approach to accommodating these increases in the journey towards a full living wage.

See also the ETI blog What does a National Living Wage really mean?