LIVING WAGE. Wages in international supply chains

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1 LIVING WAGE Wages in international supply chains

2 2 Working for a living is a matter of course in the Western world. You would like your employees to earn enough to make a decent living, and you have the same ambition for the employees of your suppliers in emerging markets and developing countries. However, in these countries, the vast majority of workers and their families struggles to survive on wages that are barely enough to cover their daily subsistence needs. How could you contribute towards improving this situation? This brochure will tell you more. Living wage Paying a living wage in international supply chains What is a living wage? A living wage is enough to meet the basic needs of the worker and his or her family. Basic needs are food, housing, clothing and other costs, such as education and medical costs. An additional component that is sometimes included is discretionary income. Smallholders in agricultural supply chains do not receive wages. Since they are business owners, the concept of a living income applies to them. The idea behind the living wage concept (to create decent living standards) is the same as the idea behind a living income, although they require different interventions. A living income is often the result of productivity improvements, increases in scale and better quality products. Agnes works at a flower farm in Tan- A universal human right zania. She earns a little more than A living wage is internationally considered as a human right. The United Nations 31 euros per month, which is just Universal Declaration of Human Rights (1948) and various declarations of the enough to pay for her house without International Labour Organisation (ILO) recognise the need for workers to receive electricity and running water. She a living wage. and her 6 children only eat maize. Business enterprises too are expected to take responsibility in respecting interna- She cannot afford to send all her tionally recognised human rights. The Guiding Principles on Business and Human children to school. Rights (2011), endorsed by the UN Human Rights Council, states that business Source: enterprises have the responsibility to respect human rights in countries where in-action/people/agnes-story. they operate. This responsibility applies to their own activities, as well as to their business relationships in the supply chain. Living wage is thus a part of CSR and responsible supply chain management.

3 3 Aren t nationally or regionally established minimum wages sufficient? The minimum wage in the electron- In many developing countries, if a legal minimum wage exists, it does not cover ics sector in Tamil Nadu, India is 2 living wage requirements. In most cases, the legal minimum wage will be lower euros per day for unskilled workers, than the living wage. Sometimes minimum wages are high enough in theory, but and 2.30 euros per day for skilled they are not applied and enforced in practice. Workers in these situations will take workers. As a comparison, the Asia on excessive overwork in an attempt to lift themselves and their families out of Floor Wage Alliance calculated a poverty, putting their mental and physical health at risk. living wage of 112 euros per month for India, equal to approximately 5 euros per day based on a 48-hour How do you calculate a living wage? Food Market basket Non-food Engel s law working week. Source: labour.nic.in/wagecell/ Basic needs Core Family Discretionary income Wages/TamilNaduWages.pdf x 105 or 110% Additional Family size No. of workers per household Variable Number of calories Take home pay Preconditions Normal working hours (max. 48 hours per week) A common approach for calculating a living wage is: 1. In developing countries, approximately 50% of household income is spent on food and 50% on other costs (according to Engel s Law). This percentage may differ slightly per country or region. A market basket study can be done to establish the cost of food consumption on the basis of 3000 calories per day. 2. This is multiplied by 2 in order to account for the other 50% costs for housing, clothing and other expenses. 3. X 2 for family needs (family of 4, with 2 full-time workers) 4. X 105 or 110% discretionary income.

4 4 Variable elements in this calculation are the number of calories, the family size and the number of workers per family. These elements may vary per country and/ or region. When companies provide their workers with housing, meals or medical care, this may be taken into account in the calculation. Several NGOs, international and local trade unions and labour research institutes have made living wage calculations that you can consult. In the case of the fashion & textile sector, the Wage Ladder developed by the Fair Wear Foundation shows several wage benchmarks per country. Tip: it is important that you do not allow the challenge of how to calculate a living wage to distract you from getting on with taking concrete steps in the direction of living wages. Am I pricing myself out of the market? Of course you would like your supplier s employees to earn a decent living. But at the same time you want your company to stay competitive and profitable. Yet rising labour costs may be compensated by other benefits such as: attracting skilled labour and lowering employee turnover, which limits training costs; increasing the consumer price, possibly supported by a sustainability label or sustainability marketing; productivity and efficiency improvement: e.g. more efficient use of energy and water, improved human resource management, more efficient production process, state-of-the-art machines, etc.; absorbing wage costs elsewhere in the supply chain.

5 5 Benefits may be intangible as well: suppliers that pay living wages are often professionally managed companies; a happy workforce leads to increased productivity and quality; better reputation; stable, longer-term relations between buying and supplying companies and the chance to become a preferred supplier. What can I do? Realising living wages in your supply chain is not easy, but you can actually take some steps in the right direction. The figure below shows how to work up to a living wage. This process cycle can also be used for working on respecting human rights and CSR social compliance criteria in general. Define and adopt a living wage policy Integrate grievance mechanisms in stakeholder management Track performance and report Assess impacts of company activities on wages, taking into account supplier capacity and purchasing practices Integrate values and findings in corporate culture and (supply chain) management Each step has certain difficulties. Following conversations with companies, supply chain initiatives and NGOs, we have mapped the most common obstacles in the process towards realising living wages. Solutions for these obstacles, the support you might need from others and the steps that other actors should therefore take have been elaborated in the Obstacle-Solution-Support table, available at You can make good use of the expertise of others at each step in the process cycle. We therefore advise you not to tackle the issue of living wages alone. Supply chain initiatives in several sectors have the knowledge and expertise to accompany you in taking the five steps of the living wage process cycle, and monitoring and audit sys-

6 6 tems are often part of these initiatives. In addition, cooperation with your industry partners that source from the same supplier is of great importance. Supply chain initiative* Sector Website Business for Social Compliance Initiative Not sector-bound Ethical Trading Initiative Not sector-bound Fair Labor Association Not sector-bound Fairtrade Several food products, flowers, gold, cotton, sport balls Fair Wear Foundation Fashion Roundtable on Sustainable Palm Oil Palm oil Social Accountability International (SA8000) Not sector-bound Utz Certified Coffee, tea, cocoa Working Group on Sustainable Natural Stone Natural stone *Not every supply chain initiative has included a living wage as a condition in its Code of Conduct. Some initiatives have indicated living wage as a result of other interventions. Where do I find more information? Under the authority of the Dutch Ministry of Foreign Affairs, Berenschot conducted research on how companies can contribute towards realising living wages in international supply chains. You can find the report online at livingwage. You can find more information on living wage and wages in general on these websites: This brochure has been published thanks to the Sustainable Economic Development Department of the Dutch Ministry of Foreign Affairs.

7 7

8 Berenschot Groep B.V. Europalaan KS Utrecht T +31 (0) E Berenschot is an independent organisation consulting firm with 500 employees in the Benelux. For over 70 years, we have impressed our clients in both the public and private sectors with smart, new insights. We go out and acquire new insights and turn them into something practicable. We do this by combining innovation and creativity. Each time, over and over again. Clients opt for Berenschot because our advice gives them a head start. Our bureau is staffed with inspiring and determined individuals who all share the same passion: organising. Interested in transforming complex issues into practicable constructs. Because of our broad sphere of activity and expertise, clients can call on us for a wide variety of assignments and projects. And we can put together multidisciplinary teams to tackle all aspects of an issue. Berenschot is a member of the E-I Consulting Group, a European joint venture of leading consultancy firms. Furthermore, Berenschot is a member of the Council of Organisation Consulting Firms (ROA) and abides by the ROA Code of Conduct.

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