Why companies who pay a living wage create wider societal benefits

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Sanda Ojiambo, CEO and Executive Director, UN Global Compact

• Too few companies pay their workers a living wage, despite mounting evidence that a living wage lifts people out of poverty and strengthens businesses.
• Consequently, in an age of abundance, inequality is growing for more than 70% of the global population, even in advanced economies.
• L’Oréal, for example, is committed to paying all of its strategic suppliers’ employees a living wage by 2030.

I have a question for employers: Are you paying your workers a living wage?

I don’t mean the minimum wage, which has failed to keep up with the cost of living in most countries. I mean a wage earned during normal hours of work that can provide a decent standard of living for workers and their families. According to the International Labour Organization (ILO), a living wage should be enough to cover the costs of all essentials, such as food, health, education, housing, and other necessary goods and services, in accordance with national circumstances.

The World Benchmarking Alliance, a partnership measuring progress on the United Nations’ Sustainable Development Goals, finds that only 4% of the world’s top 1,000 companies are paying their workers a living wage or have targets to do so.

This is shockingly low, considering the number of businesses that claim to respect labour and human rights. And, it explains why, in an age of abundance, poverty and social inequality are on the rise, even in advanced economies. In the UK, 3.7 million employed workers, or almost 13% of the workforce, struggle to make ends meet, according to the Living Wage Foundation. In the United States, almost 23% of the workforce labour in low-paying jobs, more than twice the level found in Chile, France or Japan.

Constraining economic growth

Despite unprecedented economic growth over the last few decades, wages have stagnated globally and have not kept pace with rising productivity. This means that shareholder payouts are rising faster than wages, so workers don’t get a fair share of the productivity they deliver. Working poverty is now a global phenomenon. Today, more than a billion working people – one-third of all workers – earn less than they need for a decent standard of living.

This state of affairs is neither desirable, nor sustainable. Short-changing workers is in nobody’s interest. Low wages erode trust in our political , economic and social systems. They tear at the fabric of society and constrain economic growth. In the business context, low wages are not a cost advantage – they are a cause of systemic risk.

Benefits and challenges of paying living wages

A collaboration of academics and NGOs has explored the business benefits of living wages and found that living wages not only offer a way out of in-work poverty and help tackle inequality, they also support business resilience, stability and growth. A study by the Living Wage Foundation found that 93% of companies paying a living wage experience benefits for their business; 87% report improved reputation; 75% report increased motivation and retention rates for employees; and 58% report improved relations between managers and staff.

Despite the numerous benefits of paying living wages and ensuring living wages for workers across supply chains, when I meet business leaders and raise the subject of living wages, many express concerns over the impact this would have on their bottom line. They say that increasing wages could lead to financial instability and impact profit margins and competitiveness. They also cite the challenges that complicate the payment of a living wage, including the role of pricing and sustainable purchasing practices.

Paying a living wage is an important investment in human capital, recognizing that employees are the most valuable resource of any company. In turn, living wages should not be seen as a cost but as an investment in long-term return.

Companies are demonstrating that paying living wages is achievable and the right thing to do. Globally, big groups such as L’Oréal, Unilever, Schneider Electric, Michelin, and UPM have made public commitments to paying living wages in their own operations and/or are taking action to pay living wages across their supply chains. L’Oréal, for example, is committed to paying its suppliers a living wage by 2030.

A helping hand

For companies operating in multiple markets and with hundreds or thousands of suppliers all over the world, paying living wages across their own operations and working with suppliers towards living wages can seem like a daunting task. Fortunately, there are organizations that can help, including my own, the UN Global Compact, the world’s largest corporate sustainability initiative.

We have a Living Wage Analysis Tool for guidance, which has been used by more than 1,000 companies so far, and last September we launched the Forward Faster initiative for companies to set ambitious, yet achievable, targets on the living wage.

Advancing social justice

Paying a living wage is a powerful action businesses can take to advance the social justice agenda. It is an opportunity for companies to make a big, positive, social impact, in a way that benefits their businesses, as well as employees, people in their supply chains and the communities in which they operate. Living wages are also a clear and measurable indicator for identifying companies that put values and social purpose at the heart of their business practice.

The private sector has a responsibility to drive progress towards a living wage economy. This requires a shift in mindset – from viewing workers as mere cogs in the machinery of production to recognising them as valuable stakeholders deserving of dignity, respect and fair compensation.

No one should have to choose between putting food on the table or heating their homes, between paying the rent or paying for medicines. If all businesses embrace living wages, these awful choices may become things of the past.