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Living Wage Standards in Codes of Conduct

October 1, 2004

In an effort to establish a floor for wages which provides for a worker's basic needs, codes of conduct which deal with wages and benefits have focused on three standards:

  • The minimum wage required by law
  • The local "prevailing industry wage"
  • A "living wage"

The first is obviously the easiest to accurately measure, but has been deemed inadequate by most parties because legal minimum wage has been kept artificially low in most countries to attract investment. Market-basket studies have found that, without working excessive overtime hours, the minimum wage in many countries is not sufficient to meet a worker's basic needs.

The "prevailing industry wage" is an ambiguous premise. It may be higher than the required minimum or may simply meet legal requirements, but in either case this language provides no measurable guarantee that the prevailing wage is sufficient to meet a worker's basic needs. In most countries the minimum wage is the prevailing wage.

For this reason the most credible codes of conduct have required that companies provide workers with a "living wage".

In order to better understand how a "living wage" might be defined and why it is useful to look at how major monitoring/verification organizations are dealing with the living wage standard when monitoring compliance with codes that include a living wage clause.

Three major multi-stakeholder initiatives monitor for a "living wage": Social Accountability International's SA8000, the Ethical Trading Initiative (ETI), and the Worker Rights Consortium (WRC). The Fair Labor Association does not use a "living wage" standard in its code.

SA8000

Individual factories are monitored for compliance with the SA8000 code of conduct, which stipulates:

The company shall ensure that wages paid for a standard working week shall meet at least legal or industry minimum standards and shall always be sufficient to meet basic needs of personnel and to provide some discretionary income.

Social Accountability International (SAI) auditors monitor for a living wage by a combination of qualitative and quantitative analyses.

They recommend two quantitative methods: one, a comparison of wage levels against poverty line data for a given country, where it exists, and; two, a market basket survey.

Basic needs are determined by calculating the cost of the basic food basket needed for an adequate diet, the percentage of an average household's budget that goes to food, and the average size of a household in a given country.

Without getting into the specific formula used, a living wage is calculated as a wage sufficient to provide food and the remaining basic needs for the worker and half of the average number of dependents in a family in that region, with an additional 10% added on for discretionary income. The SAI auditors thereby assume that in each family there will be at least two wage-earners.

Qualitative methods used by SAI auditors include comparing wages with those of a unionized company in the region (providing independent unions exist in the area), and worker interviews.

Both qualitative and quantitative methods are used in an audit to verify the results one against the other.

Ethical Trading Initiative

The ETI code, almost identical to the SA8000 code, says:

Wages and benefits paid for a standard working week meet, at minimum, national legal standards or industry benchmark standards, whichever is higher. In any event wages should always be enough to meet basic needs and to provide some discretionary income.

ETI identifies two possible approaches to determining a living wage: applying a standard formula to each country, or allowing local negotiation to set the appropriate level in that region.

ETI notes two "formula" approaches, the SAI approach described above and the formula adopted at the 1998 Living Wage Summit at Berkeley California.

The Living Wage Summit formula calculates basic needs using a defined list including housing, energy, nutrition, clothing, heath care, education, potable water, childcare, transportation and savings. Those costs are multiplied by the average household size and then the total is divided by the average number of adult earners in that region. Discretionary income of 10% of the total is added on.

ETI warns that the "formula" approach may be too static, not allowing for collective bargaining and potentially serving as an effective cap on wages rather than floor. They also note that the average number of wage-earners and the average family size may vary by industrial sector and type of employment.

The "negotiated" approach discussed by ETI is based on a bottom-up approach in which workers, NGOs and trade unions in the producing country are involved in research on basic needs which is then used to bargain collectively for their specific needs.

While international labour leaders, such as Neil Kearney, General Secretary of the International Textile, Garment and Leather Workers Federation (ITGLWF) have supported the inclusion of living wage provisions in codes of conduct, they have been less interested in developing a universal formula and more concerned that workers have a role in determining what is a living wage in their local context. They insist that free collective bargaining is the most legitimate method of determining a living wage by local standards.

ETI warns however that this approach is difficult to audit and may be too flexible. They note also that workers and NGOs in any one country may lack the bargaining power to achieve a living wage. However on balance ETI "leans towards the negotiated approach" because they believe consultation and involvement of all parties "will provide a more secure foundation for the wage-floor we are seeking."

Setting wages and benefits through free collective bargaining is clearly preferable but as long as companies are not committed to seeking basic wage levels in all of their operations they will remain free to "cut and run" when workers at one factory bargain their way to improved conditions. Therefore a provision identifying at minimum an objective for wages and benefits needs to be included in a code of conduct.

Worker Rights Consortium

The WRC uses the formula approach in its living wage clause:

Wages and Benefits: Licensees recognize that wages are essential to meeting employees' basic needs. Licensees shall pay employees, as a floor, wages and benefits which comply with all applicable laws and regulations, and which provide for essential needs and establish a dignified living wage for workers and their families. [A living wage is a "take home" or "net" wage, earned during a country's legal maximum work week, but not more than 48 hours. A living wage provides for the basic needs (housing, energy, nutrition, clothing, health care, education, potable water, childcare, transportation and savings) of an average family unit of employees in the garment manufacturing employment sector of the country divided by the average number of adult wage earners in the family unit of employees in the garment manufacturing employment sector of the country.]

To date, the WRC has not been required to respond to any complaints regarding the living wage standard and therefore they have not yet adopted a preferred methodology for verification. They have conducted some worker interviews in which they built a market basket for wage comparisons, but this has not yet been used in the course of a report of specific violations. The violations which they have been called to investigate have centred primarily on complaints of overtime violations, failure to pay wages due to workers, and freedom of association problems.

Code language on "living wage"

Given the above, what should a code of conduct say about wages?

It is insufficient for a modern code of conduct to rely only on the legal minimum wage or the prevailing industry wage as an acceptable standard. While there is not a universally-accepted definition of a living wage in each producing country, including a living wage standard as the goal or aspiration of a code allows the institution to engage with companies to improve conditions where wages are found to be, though legal, insufficient to provide for a worker's basic needs.

The University of Toronto code says

Licensees and their contractors must provide wages and benefits which comply with all applicable laws and regulations and which match or exceed the local prevailing wages and benefits in the relevant industry or which constitute a living wage, whichever provides greater wages and benefits. It is the spirit and goal of this clause that wages should be sufficient to meet basic needs and to provide some discretionary income.

MSN's "Model No Sweat Municipal Purchasing Policy" says:

Wages and benefits paid for a standard working week meet, at a minimum, national legal standards or industry benchmark standards, whichever is higher.

In any event wages paid for a standard working week should always be enough to meet basic needs of workers and their families and to provide some discretionary income.

All workers shall be provided with written and understandable information about their employment conditions with respect to their wages.

Deductions from wages as a disciplinary measure shall not be permitted.

In both cases the code language provides the opportunity to use a "living wage" standard should there be complaints that the minimum or prevailing wage does not provide for basic needs and discretionary income.

In both cases the code language also allows for the determination of what constitutes a "living wage" to be carried out using any of the methods described above - a formula, a market basket study, worker interviews, or a negotiated/collective bargaining approach. Given that social auditing is still in its infancy and that it is being carried out in a wide variety of regional contexts, it's better that code language allow this flexibility rather than committing to any particular formula or methodology.

Lastly, the additional code language in the model code regarding information and deductions should be included.

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