Carla Romeu Dalmau
Published 1 year ago.
About a 7 minute read.
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.
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
Better business resulting from more productivity, less turnover and a better
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
and the corresponding Call to
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.
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
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:
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
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.
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.
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
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.
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.
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
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
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
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.
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.
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.
Published Jan 19, 2022 7am EST / 4am PST / 12pm GMT / 1pm CET