The "Living Wage" Clause in the ETI Base Code
- How to Implement it? (continued)

 prev

The Negotiating Framework

To give some shape to a negotiated approach to setting the living wage, an agreed framework is needed. Three elements are suggested for this framework: a set of principles, a definition of the living wage and a methodology.
 

Principles

1. The living wage should be earned within the regulated hours of work.

This principle arises directly from the application of the ETI Base Code, but needs to be articulated because of the impact of the hours of work on the total wage paid. The phrase "within the regulated hours of work" means observing the limits on ordinary and overtime work, paying for overtime at the appropriate premium rate, allowing the correct number of days off and the correct amount of paid holidays.

2. Within a given workplace, or closely-related group of workplaces, there should be equal pay for equal work, regardless of age, gender, ethnicity or number of dependants.

The labour market contains a complex mix of standardisation and differentiation. People who have similar needs (e.g. a large family to support) are paid differently according to their level of skill, position in the hierarchy, the financial state of the company they work for or the local economic conditions. On the other hand, people who have different needs (e.g. a single person compared with a parent) are often paid similar incomes when they are doing the same or similar work in close proximity with each other. In general, pay rates only reflect individual needs in a roundabout way - i.e. the rate of pay has to be high enough to attract a sufficient number of the neediest people that a company needs to attract. Once the market establishes the rate it is also paid to people with fewer needs. So a workplace typically contains people of varying needs being paid on a (more or less) common pay scale. Some people may find that they can live reasonably well, while others find that all their income goes on essential purchases. To an extent these differences are ameliorated by the natural evolution of lifetime earnings, but differences do typically persist.

The relevance of this observation to the ETI definition of the living wage is that we should expect to find a variety of personal financial circumstances within a given workforce. The living wage should be set by reference to those with greater needs, rather than to those with fewer needs. Once struck, we should expect that the living wage will deliver a relatively better income to that part of the workforce which has lower financial obligations, and that should be seen as part of the normal variability of life, not as an argument for setting the defined living wage at a lower level. 

3. Payment of a living wage should not be evaded by misuse of casual, sub-contract, homework or apprenticeship contracts. [19]
    
4. Real wages should be expected to rise over time.

Ensuring that living wages are paid is not a one-off thing. In a normally-functioning economy real wages tend to rise over time, in response to improvements in productivity, national per capita incomes and expectations, and the influence of collective bargaining. Indeed, people working in the supply chains in developing countries will only be able to maintain and improve their relative position in the global income distribution if wages rise in real terms over time.

We should expect to see a parallel upward movement in the living wage, because of the link with expectations.
 

Definitions 

1. The living wage is the wage rate which is required to support an employee, meet the financial obligations of the employee towards his/her dependants, and provide some discretionary income. [20]
    
2. For the purposes of this definition "employee" means an employee who is towards the higher end of the typical needs scale of the workforce.
    
3. The required wage rate (basic needs plus discretionary income) should reflect the historically determined expectations of the particular society at the time the calculation is made.

It has long been recognised that there is an expectations element in wage setting - even of minimum wages - so that what is considered to be an adequate living wage at one point in time is superseded by a higher figure in later years. Expectations are historically and culturally determined and relate, in the final analysis, to the ability of an economy to deliver a particular standard of living and the distribution of income within the given society at a particular point in time. Typically, expectations affect judgements about: the size and quality of living space, the quality of household facilities, the stock of clothing and other possessions, the composition of the diet, the ability to travel and save.

It is important to include the element of expectations in the definition of the living wage to make clear (a) that we are not talking about a physical subsistence minimum, and (b) that we expect the living wage to rise over time as the capacity of the economy in question improves and the general standard of living rises.
 

Method of Measurement

The monetary amount of the living wage should be calculated from properly-conducted surveys of local living costs. Items to be surveyed should be agreed locally but should include as a minimum: food, clothing, housing, medical care, necessary social services and security. [21] To avoid duplication, companies may wish to co-operate by jointly contracting reputable southern expertise to carry out this work.

Notice should be taken of previously established benchmarks (e.g. minimum wage legislation, collective bargaining agreements, poverty-line studies) where these contain explicit or implied measures of the local living wage.

The number of dependants to be included in the living wage calculation should be determined by studying the demographics of the local working population to which the standard is to be applied.

Allowance should be made for income in kind (e.g. food and accommodation) supplied directly by the employer, though care must be taken in the way this is calculated.

Account should also be taken of wage deductions, e.g. for loan repayments.

Government-provided services will have an impact on the measured living wage. For example, if employees have to pay directly for health and education services, the monetary amount of the living wage is likely to be higher than if these services are provided free by the government.

Where employees receive cash benefits (or tax rebates) from the government, care must be taken in assessing the impact on the living wage calculation. Reducing the calculated level of the living wage in these circumstances may contradict the policy objective being pursued by the government and lead to a de facto wage subsidy. This outcome should be avoided.
 

Consultation and Negotiation

Companies should consult widely with the local community about the appropriate level of the living wage, then negotiate the precise amount with representatives of the workforce in a manner consistent with the freedom of association and right to collective bargaining provisions of the ETI Base Code (ILO Conventions 87 and 98).

In conducting these negotiations it should be borne in mind that the result of the negotiations must be capable of standing up to independent scrutiny as a genuine living wage. There are likely to be situations where the negotiating power of the local work force is weak because union representation is undeveloped or because the labour market over-supplied. In these cases, the responsibility of the company to arrive an adequate measure of the living wage (through study and consultation) is proportionately greater.

 

Bibliography 

• ACORN (Association of Community Organisations for Reform Now), Living Wage Ordinances: A Closer Look, July 1999, 24/2/00.
• ACORN, Living Wage Successes: A Compilation of Living Wage Policies on the Books, December 1999, 24/2/00.
• Athreya, Bama and Natacha Thys, Empowering Workers Towards a Living Wage - A Position Paper, International Labour Rights Fund, Fall 1999.
• Bole, William, Citizens Define Their Own Living Wage, American News Service, October 1996, 24 Feb 2000. [This paper was on website http://www.crisny.org/ but has since been moved or removed]
• Business for Social Responsibility Education Fund, CSR Topic Overview, Living Wage/Basic Material Needs, BSR, 1999.
• Council on Economic Priorities Accreditation Agency, Guidance Document for Social Accountability 8000, 23 April 1999.
• Daloz, Jean Pierre and Michael Barruel, Research into a Method of Defining "Decent" and "Fair" Wages within the Meaning of Article 4, Paragraph 1, of the European Social Charter, mimeo, March 1993.
• Dhanarajan, Sumi, Wages, Oxfam Working Paper, October 1999.
• Council of Europe, Document Concerning Article 4 Paragraph 1 of the Charter, France, Germany and Luxembourg, Cycle XIV-2, 154th Session Plenary Committee, Strasbourg 25-29 May 1998.
• Council of Europe, Document Concerning Article 4, Paragraph 1 of the Charter, Cycle XIV-2, Strasbourg 10 June 1998.
• Global Exchange, Wages and Living Expenses for Nike Workers in Indonesia, September 23 1998.
• Galbraith, J.K, A Global Living Wage, Political Quarterly, 1995, Vol. 66, No. SPI, pp 54-60.
• Labour Behind the Label, Threadbare - A Report on Wages in the Fashion Industry, 22 October 1999.
• Low Pay Commission (UK), Minimum Wage Systems in Other Countries, Appendix 6 of Low Pay Commission Report.
• Lustig, Nora Claudia, and McLeod, Darryl, Minimum Wages and Poverty in Developing Countries: Some Empirical Evidence, 1998 Conference Report, British Library Shelfmark 98/01176, pp 62-93.
• Tabatabai, Hamid and Manal Fouad, The Incidence of Poverty in Developing Countries - an ILO Compendium of Data, International Labour Organisation, 1993.
• The Just Wage and the Standard of Living, Contributions in Economics and Economic History (1996), Issue 169, pp1-12.
• Trades Union Congress, The National Minimum Wage, TUC Evidence to the Low Pay Commission, 26 September 1997.
• United Nations Development Programme, Human Development Report 1997, UNDP, New York, 1997.
• Witte, John F., Report on the Living Wage Symposium November 19-21, 1999, Robert M. La Follette Institute of Public Affairs, University of Wisconsin-Madison, Feb 8 2000.

 

Appendix: Living Wage Data

Following is an indication of the types of measures and data that ETI will be seeking when we begin pilot measurements of the living wage in particular geographic and industry locations:

1. An absolute measure of the wage - i.e. what it buys in real terms (including income in kind) and whether this is enough to meet basic needs and leave some discretionary income, given the characteristics of the workforce in question.
    
2. How this wage compares to the international poverty line (US$1 per day in 1985 Purchasing Power Parity terms) and to local benchmarks such as the local minimum wage.
    
3. A relative measure of the wage - for example the wage expressed as a percentage of per capita GNP.
    
4. Time series data - how the wage has been changing in real terms over a period of time.

(2) and (3) are derived measures and would be worked out by calculation from published information.

The raw data we need:

Income:

• the wage paid (in local currency)
• the length of the working week for which the wage was paid
• income paid in kind, if applicable, (accommodation, food, transport)
• wage rates over the last three to five years
• the dates on which the measurements were recorded (this is to allow for currency conversion in subsequent calculations, and to match price data with wage data).

Needs:

• family circumstances and obligations of the workforce (children to support? etc)

Expenditure:

• "basket" of goods and services that the worker needs to buy out of cash income
• the price of that basket
• the price of that basket over time (to match the wage time series)
• is there a residual for savings/discretionary expenditure? How much?

 

Notes: 

1. Lustig and McLeod (1998 ) p 81. [context] 
2. Ibid p 90. [context] 
3. TUC (1997) p 16. [context] 
4. Daloz (1993) p 35. [context] 
5. Purchasing Power Parity. [context] 
6. Low Pay Commission, p 210, 212 [context] 
7. ACORN (July 1999) p 1. [context] 
8. ACORN (December 1999). [context] 
9. ACORN (July 1999), p 3. [context] 
10. See below, p 5. [context] 
11. ACORN (July 1999) pp 2, 3; ACORN (December 1999) pp 1-8. [context] 
12. ACORN (December 1999) p 2. [context] 
13. The Living Wage Summit was an NGO summit held at the University of California at Berkeley on 17-19 July 1998. [context] 
14. Sweatshop Watch, Report on Living Wage Summit, 1 December 1998. [context] 
15. CEPAA (April 1999) p 38. [context] 
16. Ibid p 37. [context] 
17. Athreya and Thys (1999) p 1; Labour Behind the Label (1999) pp 3, 20. [context] 
18. Athreya and Thys (1999) p 7. [context] 
19. Point 8, ETI Base Code [context] 
20. See ETI Base Code, paragraph 5.1. [context] 
21. Business for Social Responsibility (1999), following Article 25.1 of the Universal Declaration of Human Rights. [context]

[Links in Notes 19, 20 are to the
English version of the Base Code -
click here to choose another language]

 

ETI Contacts

For further information, please contact ETI