Supply Chain

Different Paths, Common Goal:
How More Companies Are Providing Living Wages

Paying living wages throughout supply chains can mean changing business models, which can seem insurmountable. But a series of case studies from IDH shows how companies and coalitions are making real progress on their commitments.

Brand Provided | By Carla Romeu Dalmau | Published 2 years ago | About a 7 minute read

Image: Eosta

If there is one thing that we have learned in our extensive work on living wages with the private sector and many other partners, it is that there is no silver bullet, no singular solution. What is clear: Achieving living wages is a shared responsibility among stakeholders across global supply chains who all have a role to play.

Paying living wages throughout supply chains means changing the way business models operate, which can seem insurmountable. For many companies, it is hard to know where to begin. Supply chains can be opaque, consumers demand lower prices, and competition puts pressure on production costs. But for forward-looking companies, the potential benefits of working towards a living wage are great:

Better business resulting from more productivity, less turnover and a better marketing proposition
Greater worker commitment, motivation and morale
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And better quality of life for workers.

In December 2021, we met virtually with all partners of IDH’s Living Wage Roadmap and the corresponding Call to Action to learn from one another and discuss how we move forward in our own ways. Over 80 representatives of companies, certification bodies, governments and trade unions have committed to taking action to close living-wage gaps. We learned from real-life examples of several companies that have worked to identify and close wage gaps in their supply chains. While it is clear that there is a moral imperative for living wages, there is also an undeniable business case.

Critical insights on the living-wage journey

Through the work done to date by companies and partners engaged in the IDH Roadmap, we’ve identified five key insights that can help any business embarking on the living wage journey. The common basis of all progress is a firm understanding of your supply chain and the gap between a living wage and what workers are earning now.

That is why the first steps in our Roadmap include identifying reliable living-wage benchmarks wherever you source your products and measuring the gap between that and what workers earn now — this is where IDH’s Salary Matrix comes in. Once you have a strong understanding of the wage gap, potential actions for achieving a living wage become clearer.

Here are the five key insights based on the work of partners and companies:

A living wage is achievable

One of the perceived barriers to paying a living wage is the cost. Among the four examples we looked into, the amount needed to achieve a living wage per trade unit varied from €1.65 or 0.3 percent more per phone (consumer price) to €0.10 or 10 percent more per kg of mangos (FOB price).

For example, European produce distributor Eosta (aka Nature & More) used the IDH Salary Matrix to calculate the living-wage gap for all workers employed by its mango supplier Fruiteq, in Burkina Faso. Given that Eosta sources 100 percent of its mangos from Fruiteq, they have a good overview of the value they can add. An additional €0.10 per kg of mangos contributed to closing the living-wage gap for Fruiteq’s workers.

Read the full case study here.

Price escalation is avoidable

Next to the cost of paying a living wage, price escalation presents another tripping point for many companies. Price escalation can occur when each actor in a supply chain adjusts its price in reaction to increased costs in another part of the supply chain. This can often result in higher prices for consumers than what paying a living wage would entail.

It doesn’t have to be that way. Good business practices can mitigate or eliminate this effect.

Solutions include:

Separating the living-wage cost from the price paid and working with suppliers to pay this directly to the workers.
Maintaining direct and transparent supply chain relationships.
Sharing responsibility with all supply chain actors and inviting them to participate.

Fairphone has a trusting relationship with its suppliers and ensures the payment of living-wage bonuses to workers through direct contracts with suppliers. By paying the living-wage bonus directly to the supplier, the company is able to circumvent price escalation. For the workers, this results in a monthly living-wage bonus on top of their regular salary.

Learn more about Fairphone's approach here.

Value can be added by several players

A common question in the process of closing living-wage gaps is who is responsible for the additional costs. Across our case studies, it varies widely. The key is building trust and transparency so that every actor understands its role and responsibility to workers in the supply chain.

Among the case studies we explored, the cost was primarily shared among traders, retailers and brands. In one case study, prices to end-consumers were increased to enable a living wage. In that case, the company is clear in communicating the importance of enabling living wage to consumers.

Schijvens, a Dutch workwear apparel manufacturer, used accurate wage-gap estimates to identify simple pricing adjustments that could move workers towards a living wage. A polo shirt now costs just €0.25 more, which effectively closes the wage gap in its facility in Turkey. The company shares open cost calculations with its customers to bring them along on the journey and help them understand the cost structure.

Read the Schijvens case study here.

Different paths to delivering value

Another question that comes up is how to best distribute funds earmarked for living wages. This is where a thorough understanding of the supply chain comes in. Ultimately, your suppliers and workers know how to best manage the distribution of such funds. A trusting relationship with supply chain partners will help you arrive at the best way to ensure payments that can be verified and confirmed.

Nudie Jeans pays the product price and adds its share of the living wage on top of that, but it encourages the factory to decide how to manage the payments to workers in a transparent manner. Social dialogue among management and factory workers showed that workers preferred a fair process where all workers receive a living-wage bonus, with those who have been employed for more than 3 months receiving a higher amount.

Learn how Nudie Jeans works with its suppliers here.

Among the cases studies we reviewed, there were three different methods for distributing funds:

Living-wage bonus – Some companies add living wage bonuses to each paycheck to make up the difference.
Fixed monthly living-wage salary – Companies with vertically integrated supply chains or single suppliers can directly pay a living wage to their workers.
Microfinance fund – In the case of Eosta, mangos are a seasonal crop with workers averaging three months of work per year. As a result, the effect of living-wage contributions is limited given the short, seasonal nature of the work. In this case, Eosta and its supplier have created a microfinance fund to provide workers with access to rotating credit to invest in their own businesses.

Progress is possible

Across every case study, decent progress has been made — but there is no magic wand. Building living wages into your business model requires good information, a commitment to workers, and realistic goals.

In the case of our partners working within their own factories, a living-wage adjustment was relatively easy when their customers agreed to collaborate in the effort, and they were able to completely close the gap. In other cases, when suppliers sell to many companies, the complexity increases.

For example, the clothes that Nudie Jeans buys from a supplier in India represent 3 to 4 percent of that supplier’s total production, which can blunt the impact of Nudie’s living-wage payments. Beyond raising its prices to support a living wage, Nudie is helping the supplier to make the case to other customers to make living wages attainable.

The importance of good information

Solid progress is possible when we step back and take an earnest view of our supply chains to understand the impact our actions have around the globe. For suppliers, paying a living wage results in a more committed, effective workforce. For buying companies, taking the living-wage journey builds trust with suppliers and helps them make more accurate business decisions. All that remains is collaboration — as, more often than not, no single actor can guarantee a living wage alone.