What Makes a Living Wage Different from a Minimum Wage?

Minimum wage and living wage have the same objectives—to ensure full-time workers don’t live in poverty. This often causes some confusion between the two concepts, which are in fact quite different. Minimum wage is a legal construct that is required by law, whereas living wage is currently a voluntary construct unless a government chooses to set minimum wage at the level of a living wage.  Some are taking efforts to do so. As governments set minimum wage, they are balancing two competing objectives, to reduce poverty and provide for the needs of workers and their families through work (aka living wage), and a desire to stimulate employment and economic growth. The living wage estimates are established outside of a political process and are normative based, so that we have a clear understanding of the side of the equation that represents decent work in a minimum wage setting.

What Constitutes a “Living Wage”?

Living wage has become the accepted term in English for describing decent wages. In a 2011 International Labour Organization (ILO) review of living wage descriptions, definitions, and methodologies, Richard Anker found a consensus about what constitutes a living wage. That consensus is reflected in the GLWC’s definition of living wage: “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 her or his family.”

Elements of a decent standard of living include food, water, housing, education, health care, transportation, clothing, and other essential needs including provision for unexpected events. When we estimate living wage, we do so understanding that there is typically more than one worker in a family and so divide the amount needed for the family by the average number of workers in a family in the particular place where we are estimating living wage. The result is an estimate of what is necessary in terms of wages to achieve very basic but decent standard of living—a living wage.

Why Are High Quality, Accurate Living Wage Estimates Important?

One huge challenge that has existed for some time in implementing a living wage is that stakeholders have not agreed on one definition or method of calculating living wage. It is very hard for all stakeholders to work together toward the goal of paying a living wage if there is little agreement on what that wage is. The GLWC, using the Anker Methodology of estimation, seeks to change that situation by creating high quality, detailed, and transparent estimates of living wage that are both normative and specific.

These estimates are more than numbers; they tell a story about what not earning a living wage means in the lives of workers. This is essential to getting buy-in from everyone in the supply chain for the estimate. Agreement on a living wage estimate and definition creates a scenario where all stakeholders can work together to improve the lives of workers with one goal in mind. Unions are better able to negotiate if companies and labour agree on the living wage target, governments are better able to consider decency in minimum wage setting, standards systems are able to help certified producers move toward payment of a living wage, and responsible companies are able to examine their own role in ensuring payment of living wage to workers—all without looking to multiple targets, so that when a living wage is achieved, it is satisfactory for the range of stakeholders involved in living wage issues.

Is it Possible to Have an International Common Living Wage?

Although it is important to estimate living wages that are internationally comparable, and set on a normative basis, we also believe that it is essential to create estimates that are time and place specific. An internationally common living wage adjusted for purchasing power parity for example, in the way that international poverty lines are calculated, does not provide an accurate consideration of a country’s development level or unique circumstances. As such, a common estimate would lack the accuracy and transparency necessary to build the local buy-in that enables implementation of a living wage.

Did the Workers Themselves Give Input on Their Costs to Create Living Wage Estimates Under the Anker Methodology?

Workers are always a part of the living wage benchmarking process. They are engaged through focus groups to understand important aspects of their lives, such as where they shop, what they eat, where they live (with visits to houses a key part of the methodology), and what sort of spending they may need to do on things like education and healthcare, as well as local cultural situations that influence the cost of living. But workers are not surveyed to understand current costs and expenditures, as doing so would replicate conditions of poverty. For example, we do not seek to understand what a worker is spending on food that isn’t providing adequate nutrition, or housing that doesn’t provide ample protection from the elements or has unsanitary sewage conditions. Rather, we assess the actual costs of a decent diet and decent housing by visiting markets and collecting rents for housing that meet the decency standard in a specific time and place. Worker expenditures are accounted for in the non-food / non-housing portion of Anker Methodology estimates, through national household expenditure surveys.  But it’s important to remember that we seek to avoid replication of poverty by looking at the expenditures of the population in the quintile that is likely earning a living wage in that area, and applying their non-food / non-housing to food ratio of expenditures to our own established food costs. Worker inputs are essential in the process, but the Anker Methodology is careful not to adhere to current conditions of poverty.

What Are The Advantages For a Company That is Paying a Living Wage?

There are a variety of reasons for a company to pay a living wage. Some are motivated by a desire to adhere to the UN Guiding Principles on Business and Human Rights, which state that business has a responsibility to respect the human rights of workers. Others are aiming to contribute toward the achievement of the UN Sustainable Development goals, which include ending poverty and providing decent work—this includes decent wages and thus, a living wage. Depending on the specific place, there are a variety of other factors that drive companies to work toward payment of a living wage, such as:

• Attracting business from multinational companies concerned about issues of living wage

• Increasing productivity and reducing production costs by reducing high turnover

• Recruiting better quality workers

• Reducing rejection rates

• Increasing worker commitment and effort

• Reducing number of strikes, work slowdown, and labour unrest.

• Living wage is also meant to ensure adequate nutrition and healthy housing. These basic human rights lead to less absenteeism due to illness and to higher energy levels to carry out work.

What Are The Biggest Challenges in Implementing a Living Wage?

Implementing a living wage is not a one-size-fits-all task. There are a range of issues that make a particular situation unique across industries, geographies, and supply chains. Just because a solution for paying a living wage was found in one case, that doesn’t mean that the same will work elsewhere. This is why it is important to share experiences, which is something we don’t see enough of. It’s a challenge for those trying to find a living wage solution, as they are not able to pull from other lessons to better plan what might be most effective in their own unique conditions.

Implementation of a living wage has also often been assigned to one player: the producer who employs workers. This is a huge challenge, as it typically is not possible or just for a producer to bear this entire burden. To achieve a living wage, each player in the supply chain needs to support a living wage in their own capacity, including standard systems, retailers, brands, supplier companies, unions and other labour groups, industry organisations, governments, civil society, and academia. Everyone has a role to play in ensuring workers earn a decent living. Achieving that understanding is key to successful implementation.

Are There Examples of Countries/Companies that Have Adopted a Living Wage Approach?

Yes, we have seen both companies and countries that are working toward a living wage. Vietnam’s 2012 labour code requires that minimum wage must “ensure minimal living needs of the employees and their families.” This creates an opportunity to account for living wage estimates when setting minimum wage, and the government in Vietnam has been very interested in and responsive to the Anker estimates of living wage.

Companies have also been very committed to this work, and many have sought to work with the GLWC in order to implement a living wage. A jewelry company worked with Richard and Martha Anker to develop the Anker Methodology, as they have a policy of paying a living wage to all workers in the factories where their diamonds are processed.

We have also had a lot of interest in working toward payment of living wage among all supply chain actors in specific industries, such as banana and tea. In Malawi, a large number of stakeholders including brands and producers are working together as part of a project led by ETP in partnership with IDH, Oxfam, GIZ, and the Tea Association of Malawi. This project also includes GLWC members Fairtrade International and the Rainforest Alliance/UTZ. It aims to  create a competitive Malawian tea industry where workers earn a living wage and smallholders are thriving by 2020. And it uses Anker Methodology estimates to gain agreement among all stakeholders.

What About Migrant Labour?

Accounting for migrant labour is common in Anker Methodology studies. There are many different types of migratory labour. For example, some migrants may come from rural areas of a country and migrate to urban locations for work while still supporting families in their rural homes, and some migratory labour crosses international borders with families remaining in the origin country. In all cases examined, we are guided by two main principles:

Workers shouldn’t have to migrate without their families because pay at a living wage level is not sufficient for that worker to keep their family intact. Of course, some workers will choose to maintain their family in a location separate from where they may work, and some immigration laws may make it impossible for migrant labourers to bring their families along, but a living wage is meant to enable a decent standard of living from a human rights perspective, and thus should allow for the possibility of supporting an intact family in the location where the work is done.

If a living wage estimate takes into account the cost of living from a less expensive area outside of reasonable commuting distance—for example, where migrant families may live—then local workers are never able to receive an ample wage to support themselves and their families. Further, if two different living wages are set for the same area, one for migrant labourers with families in other areas, and one for local labourers who support local families, then the living wage estimate will in fact encourage discrimination, which is not in line with the concept of a living wage within the human rights framework.