The "Living Wage" Clause in the
ETI Base Code
- How to Implement it?
By David Steele, ETI Information Officer
June
2000
Contents
Background
The Ethical Trading Initiative (ETI) is a UK-based alliance of
companies, non-governmental organisations (NGOs), and trade union organisations
committed to working together to identify and promote good practice in the
implementation of codes of labour practice in global supply chains, including
the monitoring and independent verification of the observance of code
provisions.
The ETI Base Code is derived from
the core conventions of the International Labour Organisation and covers
nine points: no forced labour; freedom of association and the right to collective
bargaining; safe and hygienic working conditions; no use of child labour;
living wages; limits to working hours; no discrimination; regularity of
employment; no harsh or inhumane treatment.
Amongst these, the living wage provision reads as follows:
Recognising the significance of wage levels to sourcing decisions, and
the importance, from an ethical trade point of view, of addressing unacceptably
low rates of pay, the members of ETI have begun to look at how the living
wage provision can be applied in practice, i.e. how the living wage provision
can be made into an auditable standard. This discussion paper presents the
results of research carried out up to February 2000 and describes the initial
approach that ETI plans to take. We have released this paper in order to
contribute to the growing international discussion of the living wage issue,
and we are interested in hearing
the views of others as to the practicability of moving forward in the
way described.
The Living Wage and the Minimum Wage
In monitoring wage rates paid in supply chains, ETI members start by
ensuring that national legal minimum wages and industry benchmark wages are
being paid. However, it is recognised that this will not ensure a living wage
standard in all circumstances. For example, Lustig and McLeod (1998) found that
in two of the countries they studied (Peru and Brazil) the statutory minimum
wage was below the "high" poverty line measure (US$60 per month at 1985
Purchasing Power Parity) reported in ILO research:
Since the poverty line is supposed to reflect the subsistence needs
for a single person, wages that are close to this line cannot be considered
high enough to be called a living wage. Allowance must be made for dependants,
and the ETI living wage provision includes an explicit reference to
discretionary income, above basic needs.
In some countries, at a certain date, the minimum wage may provide a
living wage, but in other countries it may not. A further framework of
analysis, a benchmark, or a formula, is needed.
The Relationship Between Wage Levels and Poverty
A related issue is the relationship between wage levels and poverty.
From time to time it is argued that raising wages leads to lower
welfare by reducing employment and displacing workers into the informal
economy. The counter-argument is that raising wages, within a realistic range,
produces on balance a positive effect, with higher local purchasing power, more
employment and a reduction in poverty.
The latter argument is supported empirically by the Lustig and McLeod
study, which looked at the relationship between minimum wages and poverty for a
large sample of developing countries and time periods: twenty two countries and
a total of 223 time period observations, including periods of both economic
growth and recession. A strong statistically significant correlation between
increases in minimum wages and reductions in poverty was found.
This correlation was observed in times of economic recession as well
as during times of economic growth. For example, in nine out of sixteen
observations of minimum wages rising at a time of falling GDP, poverty
was found to be reduced. [2]
When minimum wages were increased at a time of increasing GDP, there
were sixty-four observations of poverty reduction out of a total of eighty
observations.
This is a very positive finding for a living wage standard. It means
that the objective of increasing wages, within a reasonable band, is consistent
with the broader agenda of improving living standards in the societies in
question.
The Living Wage and "Fair" or "Decent" Wages
There is a considerable literature on establishing a "fair" or
"decent" wage in developed countries. In these countries there is a long
tradition of formal pay bargaining, usually with a pay floor underpinned by a
statutory minimum wage. The idea of the "living wage" may be present by
implication, but the debate is usually conducted in terms of fairness and
decency, rather than using absolute measures of purchasing power. Emphasis is
placed on relative measures of income adequacy. For example, in its submissions
to the Low Pay Commission on the National Minimum Wage, the TUC argues for
setting the minimum wage at a level based on a relationship to half male median
earnings. [3] Similarly, Jean
Pierre Daloz, in a study for the Council of Europe, argues for a benchmark
related to the average wage, the dispersion around the average and the degree
of skewness in the income distribution. [4] The concept developed is that the more
unequal the income distribution in a given country, the higher the required
benchmark for fairness and decency.
Two things stand out in these submissions and studies. Firstly, there
is not an international consensus (even amongst developed countries) for a
particular relative measure. Secondly, in practice the legal benchmarks vary
widely in both relative and absolute terms. For example, the UK Low Pay
Commission found that the PPP [5] value of the minimum wage varied from
£2.10 per hour in Spain to £4.77 per hour in Australia. And the
relative value of the minimum wage varied from 31% of the median in Japan to
57% in France. [6]
This lack of consensus and commonality amongst developed countries
means that there is no obvious quantitative measure of "fairness" or "decency"
that could be extended to the global supply chain. Furthermore, the ETI Code
refers specifically to a "living wage" rather than to a fair or decent wage, so
it seems that we must approach the question of the living wage directly in the
countries from which ETI members source.
Living Wage Ordinances in the USA
In recent years there has been a movement at city and county level in
the USA to pass living wage ordinances. These are living wage standards voted
on by local electorates or city councils and applying to employees of companies
who do business with the city or county. They have come about as a result of
campaigning by community-labour coalitions. [7]
By December 1999, ordinances had been passed by thirty-nine local
jurisdictions, including Baltimore, New York, Chicago, San Jose CA and Los
Angeles County. [8]
The wage levels established by these ordinances reflect prices, wages
and expectations in the US economy, so they are higher than would be
established in developing countries supplying the UK market. However, the
ordinances are of considerable interest for a number of reasons.
Firstly, they are the outcome of a community-political process in a
country with well-established traditions of public debate, access to
information and relative freedom of organisation. They give an insight into how
people go about assessing a living wage when they are not restrained by extreme
financial hardship or political repression. In some cases, on-going public
oversight of the process has been written into the ordinance. For example, in
Boston the ordinance establishes a Citizens Assistance Advisory Committee to
review the effectiveness of the ordinance at creating and retaining living wage
jobs and securing access to jobs for low income residents. [9]
Secondly, they make assumptions about the number of dependants that a
wage has to support, which can be compared with the assumptions underlying the
formulae that have been proposed for calculating a living wage in developing
country contexts. [10] The
typical base used in the living wage ordinances is a family of four
(e.g. Minneapolis, St. Paul, Boston, Hartford, Detroit, New Haven). [11] The living wage is expected to
support not just the worker and one dependant, but several dependants.
Thirdly, the living wage ordinances strike a rate that is much higher
than the US minimum wage. The federal minimum wage is set at $5.15 per hour,
while the living wage established by the ordinances varies from $6.25 to $11.42
per hour. The typical rate is around $8.00 per hour, with a differential
depending on whether health benefits are paid separately, or as part of the
rate. For example, the Los Angeles County ordinance mandates $8.32 per hour
with medical insurance or $9.46 without. [12]
The living wage is set at between 100% (e.g. Boston) and 130%
(Kankakee County, Il) of the poverty line for a family of four. The rate is
usually indexed to the cost of living.
The evidence of the living wage ordinances of the USA is that an
effective living wage may need to be set to meet the minimum requirements of
several dependants and that it is likely to be substantially higher than the
prevailing statutory minimum wage.
How Should a Living Wage in the Global Supply Chain be Quantified?
There are two broad approaches to quantifying a living wage under
discussion at the present time: an approach based on applying a standard
formula to each supplying country and industry, and an approach involving local
negotiation of the appropriate value of a living wage. The two are not
necessarily mutually exclusive, but they each have a distinctly different
emphasis. What are the strengths and weaknesses of each?
The Formula Approach
The formulae that have been suggested combine a surveyed measure of
basic living costs with assumptions about household size and the number of
income earners per household.
(1) The 1998 Living Wage Summit formula.
[13]
This calculates the living wage from the cost of basic needs per
person, multiplied by average household size, then divided by the average
number of earners per household, with an allowance for savings added on:
The living wage is to be earned over a maximum working week of 48
hours and basic needs are defined as housing, energy, nutrition, clothing,
health care, education, potable water, childcare, transportation and savings,
though the possibility of including further need categories (e.g.
entertainment, vacation, paid family leave, retirement, life insurance and
personal liability insurance) is floated. [14]
(2) The SA8000 formula
The SA8000 formula is a variant on the above. It splits the basic
needs measure into two components, a measure of food costs per person,
multiplied by the ratio of average total household expenditure to average
household food expenditure in the country in question. It also makes the
assumption of two earners per household by multiplying by half the average
household size, rather than combining the two averages (household size and
number of adult earners): [15]
Using the total expenditure:food expenditure ratio avoids the need to
specify a long list of basic needs. It also increases the importance of the
food measure, and the SA8000 guidance document cautions auditors to make sure
that the food measure meets the minimum dietary standard of 2100 calories per
day, that prices are correct in current market conditions and that subsidies
and inflation have been properly taken into account.
Use of this ratio is also interesting in that it is a ratio that
varies with the level of economic development of a country. As per capita
incomes increase, the proportion of income people spend on food tends to fall.
So the ratio will tend to increase over time. This will help index the living
wage to general improvements in per capita income in a country. On the other
hand, if a country suffers a development setback, the proportion of income
spent on food will tend to rise and this will push down the defined living wage
(e.g. Indonesia in 1998-99).
It should be pointed out that SA8000 does not confine itself to the
formula approach but also makes provision for the possibility of using
comparisons with wage rates in unionised work sites (where they exist) and
worker consultations. [16]
The Negotiated Approach
Advocates of the negotiated approach are sceptical of the
practicability of applying a formula internationally and feel that it
undervalues the contribution that workers in the supply chain have to make to
the definition of a living wage. The negotiated approach is based on two
complementary principles: (1) international agreement on the principle of the
living wage, and (2) local determination of the precise amount in line with
local possibilities and involving local workers in the discussion. [17]
For example, Bama Athreya and Natacha Thys of the International Labour
Rights Fund argue that:
"The tasks before us, then, on the living wage issue are as
follows: to support basic needs research, which workers can then utilise to
bargain collectively for their specific needs; to work together with producer
country trade unions and NGOs on the development of appropriate living wage
guidelines, and to lobby for the inclusion of these guidelines in a new ILO
convention and in social clauses tied to enforcement mechanisms." [18]
The negotiated approach therefore envisages a bottom-up process, with
the living wage being set by local research and negotiation, and international
guidelines being built from this base, rather than the other way round.
Assessing the Two Approaches:
Advantages of the Formula Approach
- It would provide an auditable standard for the living wage.
- Uniformity - no employer or country could say that it was being
unfairly picked on.
- Potentially easier to explain and use.
- In circumstances where the supplying company is reluctant to pay a
living wage, the formula approach may be stricter and harder to evade.
- The "average household size/average number of earners per
household" part of the formula ensures an allowance for the living needs of
dependants.
- The "food expenditure:total expenditure" ratio in the SA8000
formula may create an upward ratchet over time. As a country develops, higher
incomes are usually experienced first by higher income earners. They spend a
lower proportion of their income on food and this reduces the average
proportion of income spent on food. This in turn increases the "other needs"
multiple, which, if applied at the bottom end of the income scale, would tend
to lift the amount defined as a living wage.
- The addition of an amount for savings helps raise the living wage
above a pure subsistence level.
Disadvantages of the Formula Approach
- It is likely to be seen as a top-down approach, in which northern
standard-setting agencies impose their calculation of the living wage on people
and businesses in the south.
- It may be too static. If an employer is paying a living wage as
defined by the formula, does that relieve the employer of the responsibility to
raise incomes further?
- Where the formula uses average household sizes and average numbers
of income earners this is inherently dubious because of the segmented nature of
the labour market and the local and regional socio-economic differences within
countries. There is no inherent reason for linking the two averages in this
way. One could argue with justification that a single income should be
able to support an above-average-sized household. Using averages (e.g.
the SA8000 approach of taking the average number of household members and
dividing by two) means that all single income households with more than
half the average number of household members would receive less than a
living income.
- It could interfere with the flexibility of collective
bargaining.
Advantages of the Negotiated Approach
- It gives workers and companies in the supply chain the opportunity
to determine the result.
- It promotes collective bargaining.
- It promotes continuous improvement. It would not create a
mathematical upper limit to the definition of the living wage, so wages would
be free to move upwards as financial possibilities and expectations advance.
- It gives the negotiating parties time to address difficult
competitive issues. For example, where there are intense competitive pressures
to pay subsistence wages, it may be necessary for all major companies operating
within a particular market to agree to a higher guideline pay rate, or for
local governments to regulate higher minimum wages and enforce their payment.
- It creates advocacy and organising opportunities for NGOs and trade
unions. Where a figure is up for negotiation, rather than being pre-determined
by a formula, there is more room for advocacy and membership organisations to
develop their case and mobilise opinion around the goals they adopt. This in
turn creates a stronger long-term foundation for the living
wage.
Disadvantages of the Negotiated Approach
- It would be difficult to audit the result.
- It may appear to let companies "off the hook" in the short term, by
being too flexible.
- It may be hard to set a market standard via decentralised
negotiations, because companies will be reluctant to increase wages
unilaterally.
- Workers, NGOs and unions in developing countries may lack the
bargaining power and/or the capacity to achieve a living wage.
Discussion
The formula approach has a number of advantages, particularly the
possibility of providing a stricter standard in situations where it is hard for
workers to negotiate for a fair wage. Unfortunately, the formulae also contain
the weakness of trying to apply average household sizes and average numbers of
income earners per household to situations which are likely to be extremely
diverse socially and economically. In some circumstances (e.g. a workforce
composed predominantly of single people) the resulting wage would be
comfortably above the level needed, while in others (e.g. where there is
predominance of single income households) the result would be far too low. As
we are all aware, the labour markets in developed countries like the UK are
highly differentiated and it is hard to see how we could try to impose a
greater level of uniformity within developing countries than we have ourselves.
The negotiated approach, on the other hand, offers the possibility of
tailoring the definition of the living wage to the actual circumstances of the
localities and workforces in question. Its weakness is that it may be
too flexible in situations where workers don't have the power to
negotiate improvements. However, it opens up space for consultation and
involvement which, in the longer run, will provide a more secure foundation for
the wage-floor we are seeking.
ETI therefore leans towards the negotiated approach. However, we do
not want to be dogmatic about the choice at this early stage. ETI recognises
the advantages of having an agreed international method of calculation, if one
can be developed. We intend to test both approaches in our pilot projects, in
line with our general philosophy of "learning by doing".
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