How to Determine Fair Living Wages in Your Supply Chain

One of the biggest discussions in the modern labor market and economy in general is the concept of a living wage. How much is necessary to make from a job to support yourself and your family?

Defining a Living Wage

Ostensibly, a living wage is an easy thing to support. Everyone should be able to work one job, make enough money to live, and save some for the future. If people are working a job – or more than one job – and still can't afford to live, it's a failure of society.

Things get a lot harder, though, when you start looking deeper at the details.

The wage that constitutes a living wage can be very different for an employee living in rural Kentucky versus one living in the Bay Area, and those numbers themselves are very different from someone living in Vietnam.

After all, a big part of why companies outsourced their labor to overseas countries was to save on labor costs.

This kind of economic injustice is one of the most significant fights of the current era of social and economic development. Different perspectives vie for attention and offer different solutions. Even the global tariff situation currently unfolding is, ostensibly, meant to support domestic manufacturing, even if the reality is quite different.

So, how might a living wage be defined? The most broadly recognized source for this information is the GLWC, or Global Living Wage Coalition, which is itself an organization made up of other organizations, including groups like Fairtrade and the Rainforest Alliance, ISEAL, and SAI.

Rather than try to pin down a specific number, the GLWC makes the definition contingent on the location's unique factors.

A living wage is "The remuneration received for a standard workweek by a worker in a particular place sufficient to afford a decent standard of living for the worker and their family. Elements of a decent standard of living include food, water, housing, education, healthcare, transportation, clothing, and other essential needs including provision for unexpected events."

This helps avoid having to pin down a number that is both too little for some places and too much for others or require immense amounts of annual tracking and adjustment across regions.

If you operate with a global supply chain, you can estimate the appropriate living wages for the companies you work with by using resources such as the Living Wages Around the World Manual for Measurement by Richard and Martha Anker, which is available for free. WageIndicator and the Fair Wage Network also offer recognized methodologies, and all of them should come to similar conclusions.

The Business Owner's Role in the Living Wage

Where do you come in? As a business owner, you're part of the overall economic system, and you have some measure of control through your decisions. Part of this is about paying your own employees a living wage, but you can take it one step further and encourage – or enforce – a living wage throughout your supply chain.

It's estimated that nearly one out of five workers globally earn too little to support themselves and their families or climb out of poverty. For many, it's effectively indentured servitude, wage slavery, and an exploitative system that reinforces itself. It's up to you to avoid being an additional part of that system.

The Benefits of Enforcing a Living Wage

Living wages are a powerful force for resilient operations, loyal employees, and ongoing growth in business. When your employees know they can trust you to pay what they need to survive and thrive – and if they jump ship, they might not get as good an offer – they'll stick around.

There are also many secondary benefits to promoting a living wage throughout your supply chain. Well-paid workers generally produce higher-quality products and work more effectively. They're more dedicated and less "checked out" and are more proactive when there are problems or issues. They can even become de facto ambassadors for your brand.

Throughout all of this, promoting a living wage also helps to promote human rights. It can combat homelessness, it can fight human trafficking, it can fight back against oppression and discriminatory hiring practices, all by helping people along the way.

The biggest stumbling block in the way of this is systemic and institutional lethargy. Unions and other forms of collective bargaining help to promote better wages, but those ages might not be living wages, and it can be a long, slow, and arduous process to increase them without making other sacrifices along the way. Governments are even worse; government-enforced minimum wages lag behind the times and are an insufficient fallback.

Lest you think that this is a "third world" problem, even the United States is rife with companies exploiting minimum-wage, low-hour workers, and the governmental minimum wage is abysmal. You may have seen the factoid that the federal minimum wage – a meager $7.25 an hour – should actually be $26 per hour if it had kept up with economic and productivity growth. If anything, this is an underestimation of what it would need to be in today's economic times.

Even companies with supply lines localized to the States have a responsibility to focus on living wages throughout their chain.

How to Encourage and Enforce a Living Wage Through the Supply Line

One of the best ways that you as a business can help promote a living wage through your supply line is by putting your money down for it.

That's the bad news: yes, you'll be paying for it. But that's just the thing, isn't it? Better for it to come out of your company profits than from the health and livelihoods of the people working to make your products.

One key concept is inclusive product pricing. It's actually fairly simple in concept:

• A supplier needs to pay their workers a living wage.
• To do so, they need to make enough money to be able to afford that pay.
• To afford it, they need to price their products accordingly.
• To encourage that pricing, rather than more exploitative behavior, you need to focus on buying from these appropriately priced suppliers.

Things get tricky here because some industries are much lower margin than others. Electronics, for example, is notorious for being a largely low-margin industry at the supplier level, with semiconductor and component manufacturers averaging just 0.3% profit margins.

It's fine to say all of this, but it's harder to actually determine whether or not a company is actually paying those living wages or just charging higher prices for their own profits. You can get around this through a six-step process.

Step 1: Identify Priority Areas

The first step is to figure out where in your supply chain is most important to focus on a living wage. You can map out how big the risk of underpayment is for different suppliers and sub-suppliers and look for the largest gaps between current wages and the ideal living wage.

You also need to factor in the leverage you have available: do you have the power to enforce, via contract or other means, a living wage? Or are you just one of a thousand clients, and if you try, you'll be ignored?

Step 2: Determine the Living Wage for the Supplier

At this point, you need to figure out what the ideal living wage would be for that supplier. As already mentioned, this can be done through a variety of methodologies. It can also be worthwhile to try multiple methodologies and look at the spread, and choose one for ongoing monitoring.

• Anker
• WageIndicator
• Fair Wage
• US Monthly

The best data to get would be for the exact location where your supplier operates. Whether this is a small town or village, a larger city, or throughout a region can vary depending on the supplier.

It's also viable to take a national-level estimate if no local data is available. This is more for when you're dealing with overseas outsourcing and have no "boots on the ground" data sources, but if you're working with domestic and local supply chains, you can have a better idea.

Living wage estimates are, unfortunately, just estimates. The reality may be different for your specific supplier. It's important not to get too stuck on a single given figure, as opposed to being adaptive to different information as it comes in.

Step 3: Calculate the Wage Gap

What is the ideal living wage, and what is the current wage? What is the gap between them?

Don't forget that this is contingent on appropriate scheduling as well. Workers may report making more money than their wage would indicate, but if they're working excessive overtime to carry it, the gap is larger than it appears.

When you aren't sure of what a standard workweek is for the region your supplier is in, or if there's no standard workweek as defined by the local government, an estimate of 48 hours per week is a general baseline to use.

Step 4: Calculate Inclusive Pricing for Products

This is where things can get very complicated. Unless you're the sole buyer for a given supplier, chances are you're a small share of their overall total output. There are also a handful of different methodologies here to calculate inclusive product pricing. You can do a detailed per-product, per-role price schema, and identify wages at different roles. You can do a more simplified calculation, which risks leaving you with a less precise estimate.

The challenge here is also in getting other purchasers on board. If you only represent 10% of a company's sales, you paying inclusive pricing only increases living wage 10% closer to the ideal.

Step 5: Distribute Wages

Generally speaking, your power involves leveraging your contract to add terms that you will pay an extra premium for products, but that excess needs to go to workers. So, you need to determine how that wage is distributed. Who receives it? What is the scope? How much benefit can you bring to the supplier?

Consider, as well, how frequently this bonus payment is made. There are a lot of different factors that can influence this choice, and it's not always easy to pick the right option. Ideally, you'll work with the supplier to sort it out.

Step 6: Communicate, Verify, and Measure

Putting money into a contract and assuming you did well isn't always effective. As they say: Trust, but Verify.

Ideally, you will have set up some kind of lines of communication with workers at your supplier so you can ask them directly how the money is being distributed and whether they have any grievances to air about it. This can help you adjust future payments – or sever a contract if it's being abused.

Verification and validation of the bonus payments and commensurate increase in quality of life is also critical. Third-party validation is ideal, but it's not always available, and you may need to pay a costly consulting firm to conduct it. If you can, it's a great option.

Down the line, you can also examine the impact your bonuses have had and evaluate if you need to change anything about your program.

Further Pressure to Promote a Living Wage

While inclusive pricing is the primary go-to option, you can also leverage other pressures to help.

Practice good purchasing. Whether it's ensuring long-term contracts and stable forecasting, being proactive with on-time payments, or offering additional financial incentives for more human rights benefits, you have other pressures you can leverage.

Encourage collective action. While you can't exactly step in and start organizing a union, especially when you're geographically separate from your supplier, you can encourage and avoid inhibiting collective bargaining.

Maintain a dialogue. At the end of the day, all of this is using the leverage businesses have to promote better, more ethical, and more humane treatment of people around the world. Being open and honest can go a long way.

Sometimes, there's enough resistance or not enough leverage, and there's very little you can do. If that's the case, it may just be best to look into different suppliers, especially if you can find a smaller one where your pressure can go deeper.