How to Achieve Living Wages in Global Supply Chains

First of all, what is a supply chain?

Vivian: Basically, a supply chain is a network of companies and people involved in producing and delivering a product or service. It connects raw material suppliers, manufacturers, and distributors to deliver a finished product to the customer. Think about something like a smartphone: there are companies mining the needed metals and minerals, companies that use these to make chips, glass, and batteries, others who assemble these components into cellphones and so on. Actually, almost every company is a part of a supply chain in one way or another. You buy goods or services from somebody and often you supply them to somebody else.

Why is the supply chain important in the field of Living Wages?

Vivian: A company can pay all its own employees a Living Wage and still have large gaps among the people who produce its goods. Its purchasing practices, such as the prices and terms it offers suppliers, shape what those suppliers can afford to pay.

That is why companies are increasing expected to address the Living Wage gap beyond their own direct workforce. The expectation comes from three directions -- regulations including the EU CSDDD, the CSRD (ESRS S2) and the German Supply Chain Act; social audit and certification scheme including the SA8000, SMETA andamfori BSCI; and voluntary sustainability standards and ratings such as RSPO, Rainforest Alliance and Ecovadis which also increasingly assess whether LIving Wages are paid by companies and their suppliers.

Unilever shows what this looks like in practice. After closing its own Living Wage gap in 2020, it now aims to reach 50% of procurement spend with suppliers that have signed its Living Wage Promise by 2026. It works with various partners and is part of UN Global Compact's Forward Faster initiative, which has brought more than 800 companies to commit to paying a Living Wage. Credible, public data such as WageIndicator's Living Wage estimates make this kind of supply chain action possible.

What are the first steps needed to close Living Wage gaps in supply chains?

Mehr: For a large multinational that really wants to know whether its suppliers are paying a Living Wage, the process is quite structured.

You agree with the supplier that wage data will be shared, and then you carry out a wage-gap analysis: what are workers actually receiving, and how does that compare with the Living Wage benchmark?

Of course, even then this involves discussions and clarifications. For example: what counts as remuneration? Can a bonus be included? What about allowances or in-kind benefits? These questions can become quite detailed. But if the company has a strong relationship with the supplier and the supplier is willing to share the data, technically the analysis itself is relatively straightforward.

The more difficult part is usually agreeing on how the gap will actually be closed and who will pay for it.

When does the process with suppliers become difficult?

Mehr: Imagine you are a relatively small customer and represent less than 10% of a supplier's business. You can ask them for detailed wage data, but the supplier may quite reasonably say: “Why should we go through all this work for one small customer?” Then you may not get the complete payroll information you would ideally want. You might only know the wage of the lowest-paid worker, for example, rather than having a proper picture covering full-time workers, part-timers, contractors and other groups.

But having limited leverage does not mean you can do nothing. Fairphone is an interesting example because it is a relatively small buyer in much larger electronics factories. It developed a Living Wage bonus linked to the production of its products and has used that mechanism to contribute towards closing wage gaps even where it is not the supplier's only customer. Fairphone also explicitly says that ultimately other buyers need to contribute if all workers are to reach a full Living Wage.

Suppliers often complain that Living Wage implementation leaves them with narrow margins - how can companies and suppliers work together towards a sustainable Living Wage policy?

Dani: This is exactly why we should look not only at what the supplier pays but also at how the buyer buys.

If a buyer keeps pushing prices down, changes orders at the last minute, or gives very short lead times, and then says: “Please pay a Living Wage,” that can be contradictory.

I just came back from a training session on social dialogue and living wages at the ILO and this is one of the aspects the training touched upon -- risky sourcing practices, purchasing practices and price setting are all part of the picture.

For example, buyers should check on the number of suppliers they have -- having too many suppliers or changing suppliers frequently means that vendors don't have the incentive to build better working conditions or compliance. Similarly, a supplier with short-term contracts will not have the incentive for better working conditions or trained staff. If a big company is demanding low prices, the supplier has to cut corners somewhere else such as substandard materials, unpaid overtime or unsafe working conditions. All such purchasing practices are basically risks.

So the question is not only: “Why are wages too low?” It is also: “Are our own purchasing practices making it possible for the supplier to pay better wages?”

That can mean better prices, more predictable orders, longer-term partnerships, or sharing part of the cost of closing the wage gap.

So is paying a Living Wage mainly the supplier's or the buyer's responsibility?

Dani: It's a shared responsibility. Of course, the supplier is the employer and pays the wages. But if a buyer has strong influence over prices, volumes and delivery times, then the buyer also influences the conditions under which those wages are paid. So responsibility has to be looked at across the relationship.

The approach discussed in the training is useful here because it says: identify where the risks are, take appropriate action, build longer-term partnerships, monitor implementation and communicate about it.

So Living Wage implementation should not become: “Supplier, fix this.” It should be much more of a joint process. In practical terms, what came out of the training is the option of a permanent "Living Wages bonus" financed by the buyer (included in the product's price), but which is difficult to implement because if the buyers loose the contract, they will have to be the ones paying it. A solution to this can be longer contracts and/or a temporary Living Wage bonus (which can only be an intermediate solution). In addition to this, governments can also play a role by giving incentives to suppliers who are Living Wage companies.

When should companies start thinking about their supply chain?

Vivian: Now, and not wait for regulation to force them. Closing Living Wage gaps takes long especially in complex supply chains with many tiers and countries. Companies that start early can move step by step, at a pace that suits them and their suppliers. Those that wait may have to catch up under time pressure.

The deadlines are closer than they seem. Several due diligence and reporting laws already apply or will apply within the next few years. Buyers are also already asking suppliers about wages through ratings, audits and certification requirements. Companies that act early are better prepared for both.

A practical start does not require closing the gap at once. Companies can begin by mapping their supply chain and identifying high-risk countries and sectors. They can then compare actual wages with credible Living Wage estimates to understand the size of the gap. From there, they can engage key suppliers, review their own purchasing practices, and set a realistic timeline for closing the gap. Starting early also shows where action is most urgent, for example in countries where high inflation is eroding wages the fastest.