Scaling Up Living Wages in Global Supply Chains

woman pickingBy Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct and Marjoleine Hennis, Senior Advisor Permanent Representation of the Netherlands to OECD

Meet Ei Yin Mon, a factory worker in Myanmar. She came to Yangon after cyclone Nargis hit the country in 2008. The base wage she earns is extremely low, so she has to work many hours of overtime to compensate. “We are always being told to work faster. They think that we are like animals. I know I have no rights to make a complaint, so I have to bear it”[1].

Many workers globally face similar challenges and are trapped in poverty. They often have many mouths to feed, with too little revenue coming from regular working hours and must either compensate by working overtime or fall into debt. Sometimes workers don’t get paid at all and do not have access to grievance mechanisms to address this.

Treatment of living wage within international standards of responsible business conduct

According to the Universal Declaration of Human Rights, a living wage is a human right. The Declaration points out that everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.

The ILO recognizes living wage as a basic human right as laid out in the Universal Declaration of Human Rights, through the ILO Convention concerning the Protection of Wages of 1949 (95), and the ILO Convention on Minimum Wage Fixing of 1970 (131). It also refers to it in its Constitution and in the 2006 ILO Tripartite Declaration on MNE’s. These two pillars of international instruments (the Declaration of Human Rights and ILO standards) have formed the basis for the recommendations towards MNE’s concerning living wage as laid down in the OECD Guidelines for Multinational Enterprises since its revision in 2011.

The OECD Guidelines are the most comprehensive standard for Responsible Business Conduct (RBC) covering all areas of corporate responsibility, ranging from labor and human rights to environment and corruption. Currently, 46 countries adhere to the Guidelines. These governments made a legally binding commitment to set up National Contact Points to promote corporate responsibility and to handle complaints about corporate (mis)conduct.  Although the Guidelines are not legally binding for enterprises, they represent a “firm government expectation of company behavior” and have been endorsed by business and civil society.

The 2011 revision of the Guidelines has been important for the integration of the concept of living wages in various ways: firstly, it has resulted in the inclusion of a recommendation on living wages in Chapter V on Employment and Industrial Relations. The OECD Guidelines state that: “when multinational enterprises operate in developing countries, where comparable employers may not exist, (they should) provide the best possible wages, benefits and conditions of work, within the framework of government policies. These should be related to the economic position of the enterprise, but should be at least adequate to satisfy the basic needs of the workers and their families.”  Secondly, during the 2011 revision of the OECD Guidelines a chapter on human rights was added which, as noted, includes the concept of a right to a living wage.

Thirdly, the 2011 revision of the Guidelines introduced a concept of supply chain responsibility for companies. Among other things, this means that enterprises should avoid causing or contributing to the non-respect of living wages within their own operations as well as seek ways to prevent or mitigate adverse impacts with regard to insufficient wages linked to their operations, products or services by a business relationships,  even if they do not contribute to those impacts. In other words, enterprises are expected to make an effort vis-à-vis their suppliers to have living wages respected.

Living wage and risk-based due diligence

While the 2011 revision of the Guidelines introduced new expectations of enterprises it also equipped them with tools to respond to these expectations and manage risks by carrying out due diligence on their business operations and suppliers. The process of due diligence consists of three parts, identification of (potential) adverse impacts, prevention and mitigation, and accounting for how adverse impacts are addressed. Due diligence processes are meant to be reasonable, the appropriate response to living wage issues will thus vary according to a company’s relationship to adverse impacts.

living wage

Good practices and remaining challenges

The challenges for individual companies are numerous, especially in situations where, in the supply chain, payment of below living wages is pervasive and perceived as necessary to maintain competitiveness.  In such a context, how should enterprises apply leverage and take appropriate steps that are expected by internationally recognized standards?

First, a good understanding of responsibilities at the company level is needed. Companies should be aware of their individual responsibilities under internationally recognized standards of the ILO, the OECD and the UN concerning wages in their supply chains. With the help of OECD’s sector guidance on due diligence, for example, companies should carry out due diligence, use their leverage and take steps in their supply chain to promote living wages. These new responsibilities should also be reflected in sector codes of conduct, of which many currently ignore the tricky issue of living wage.

Better information about the business case for taking these actions with respect to risk management, reputation and productivity, would encourage enterprises to act more responsibly. Apart from ethical considerations, there are many reasons why it makes business sense to strive for payment of living wage throughout the value chain. Paying relatively low wages may lead to costs for businesses such as lower product quality, lower worker productivity and few investments in innovation due to high labor-turnover.[2]  Below-living wage payments also increase the risk of labor unrest and may lead to the disruption of operations and reputational damage to companies, particularly in the present age of mass communication.

Second, business and governments would gain from more coherence and fine-tuning of the methodologies and definitions concerning living wage. Currently a common methodology for calculating living wages does not exist. Ideally MNEs could rely upon one broadly accepted methodology which takes into account local conditions to determine what living wages should be, as well as the notion that wages should be regularly adjusted on the basis of negotiations with social partners.[3]

Third and most importantly, a sector-wide comprehensive approach is needed. Focusing on calculating the numbers and levels of wages alone will not do the trick. Even if a jump to provision of living wage levels could happen overnight, in many regions this might damage the competitiveness of factories or suppliers, potentially squeezing them out of the market and leaving many workers jobless. In order to achieve living wages in a sustainable manner a comprehensive approach is needed that brings together the largest number of possible of social partners and stakeholders so as to create a level-playing-field.

Most of the initiatives that have been successful in targeting living wage issues bring together several stakeholders. They are motivated by the need to act together and create a level playing field, not only among some enterprises and their suppliers, but in the whole sector. Some examples of these include ACT (Action, Collaboration, Transformation), a global framework on living wage that brings together all relevant stakeholders in the textile and apparel sector, as well as the Malawi Tea 2020 Revitalization Program under which tea producing companies, tea buying companies and retailers, standard and certification organizations, and tea trading companies have signed and MOU pledging to respect living wages.

These initiatives are to be praised for having paved the way forward in a new and challenging territory. However, to be really effective, these initiatives will need to be scaled up dramatically to reach other sectors and geographical areas to create a level playing field for sustainable living wages.

Ensuring the payment of living wages throughout global supply chains will be a significant challenge. However, doing so will be necessary to achieving the Sustainable Development Goals and responding to expectations of international standards of human rights and responsible business conduct.  Even if individual companies play a considerable role in this, they cannot solve this issue on their own. For one thing, (local) governments, who have the duty to protect and fulfill human rights, and ensure access to effective remedy, should be there to support them and contribute to creating the right conditions. Ideally, however, the way forward is to engage in sector-wide collaboration with suppliers, trade unions, governments, NGOs and employers’ organizations. Some promising initiatives have already been launched, such as the ACT process and the Malawi Tea MOU, or the Action Plan on Living Wages. The companies involved in these efforts deserve praise for their participation. But in order to achieve a true level playing field, the world’s remaining multinationals, some 80, 000 companies, will also need to take action and efforts will need to be scaled up and sped up dramatically.

Useful links

Resources: This blog is based on a Working Paper on Wages in Global Supply Chains, found here :

Global Forum on Responsible Business Conduct, 8-9 June

Roel Nieuwenkamp maintains a blog where all of his articles are archived. Please visit

[1] The worker’s name was changed to protect her anonymity.

[2] See Cascio W.F, The high cost of low wages, Harvard Business Review, December 2006;  and  Zeynep T., The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits– Amazon Publishing, 2014.

[3] Vaughan-Whitehead, Daniel, Introduction to the Living Wage, presented at NCP OECD Guidelines Conference-Ministry of Foreign Affairs, The Hague, 27 October 2015

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