Living wages in practice: a guide for companies

Having a job does not guarantee a decent standard of living for many workers around the world. Millions of people earn wages that are insufficient to cover essential needs such as food, housing, healthcare, education and transportation. 

Ensuring that workers earn a living wages, both within your own operations and your value chain, is an important part of human rights due diligence (HRDD). Companies are increasingly expected to identify where workers may not be earning a living wage, understand the underlying causes, and take appropriate action.

But where do you start?

2impact outlines a practical approach for assessing living wage gaps and identifying effective strategies to address them.

What is a living wage?

A living wage is the remuneration a worker receives enough to ensure a decent standard of living for themselves and their family. This includes adequate food, housing, healthcare, education, transportation, clothing and a small margin for unforeseen circumstances.

Unlike legal minimum wages, living wages are based on what people need to live decently in a specific location. As living costs differ between countries and even regions, there is no universal living wage. Companies therefore need to assess wages against locally relevant benchmarks.

Step 1: Prioritise where to assess

For many companies, assessing every operation, site, or business partner at once is not feasible. As with other aspects of HRDD, companies should use a risk-based approach. For example, they can prioritize locations or business relationships where minimum wages are known to be below living wages estimates. Alternatively, they can focus on areas where vulnerable groups, such as migrant workers, are employed or where labour rights concerns have been identified. This helps focus resources where the risk of inadequate wages is greatest.

Step 2: Select an appropriate living wage benchmark

The next step is to select a credible living wage benchmark that fits your organization’s context. Companies like the Global Living Wage Coalition and the Anker Research Institute publish living wage estimates using clear, transparent methods. To choose the right benchmark, consider factors such as:

• Relevance: Does the benchmark cover your industry, region, or worker demographics
• Methodology: Is the methodology transparent and widely accepted, such as NGO’s, governments and the industry?

Using a credible benchmark ensures that wage comparisons are accurate, fair, and consistent.

Step 3: Collect the necessary wage data

After selecting the benchmark, companies should compare current wages against it to identify gaps. Depending on the assessment scope, this requires gathering data from own operations, contractors, or suppliers. The following details may be relevant for this comparison:

• Number of male and female workers: Ensures wage fairness across genders and helps identify disparities.
• Employment type: Differentiates between full-time, part-time, or temporary workers, as wage structures may vary.
• Actual hours worked per week or month: Helps determine if workers earn enough per hour to meet the living wage benchmark when calculated against their total working time.
• Base wages (before any bonuses, overtime, or deductions): Provides the foundation for comparing against the living wage benchmark.
• In-kind benefits: Accounts for non-cash compensation (e.g., housing, meals) that contribute to workers' overall standard of living.

This information ensures a thorough and accurate comparison with the benchmark.

Step 4: Analyse the wage gap

Once wage data has been collected, companies can check if workers earn a living wage and identify any shortfalls. A living wage gap is the difference between what workers currently earn (including in-kind benefits) and the living wage benchmark. Free online tools, like the IDH Salary Matrix, can help companies calculate these gaps easily.

However, identifying a gap is only the beginning. Understanding why the gap exists is critical to determining the right response.

Questions to consider may include:

• Which workers are affected?
• How large is the wage gap?
• Is the gap driven by low base wages, reliance on overtime or irregular employment?
• Are there operational or commercial factors limiting wage improvements?
• What level of influence does the company have to address the issue?

The answers to these questions help identify the most appropriate interventions.

Step 5: Develop an improvement strategy

Closing gaps can require various interventions beyond just increasing salaries. Examples include:

• Invest in supplier efficiency by funding training or better equipment, enabling suppliers to increase productivity and pay workers higher wages.
• Encourage fair wage negotiations by requiring suppliers to engage in open discussions with workers and unions to set fair wages.
• Collaborate on product improvements by working with suppliers to enhance quality, allowing them to charge premium prices and share the extra revenue with workers through higher pay.
• Enforce fair hiring practices by only working with suppliers who offer stable contracts, fair wages, and regular pay reviews.
• Advocate for living wage policies by supporting or pushing for laws that require fair wages in supplier regions.

There is no one-size-fits-all solution for closing living wage gaps, and the most effective approach depends on where the gap exists, the company's level of influence and the underlying causes identified during the assessment.

Common challenges

Companies sometimes face practical challenges when assessing and addressing wage gaps. Some common examples include:

• Data availability: Reliable wage and remuneration data is not always readily available, particularly beyond a company's own operations. Companies can address this by engaging with relevant business partners to improve data collection.
• Migrant workers: Some companies assume that migrant workers require a lower living wage because their families live in lower-income countries. However, paying migrant workers less for work of equal value goes against the human rights principle of equal pay for work of equal value. Moreover, research by the Anker Research Institute shows that this assumption does not necessarily hold in practice, as migrant workers often face additional costs, such as maintaining accommodation in both the host country and country of origin.
• Choosing the right intervention: A living wage gap does not automatically mean that increasing wages is the only solution. Companies should first understand the root causes and identify the interventions that are most likely to lead to sustainable improvements.

Living wages as part of human rights due diligence

By integrating living wage assessments into human rights due diligence processes, companies can better understand risks affecting workers in their own operations and value chains, prioritise action where it is most needed and contribute to more resilient and responsible business practices.

At 2impact, we help companies translate living wage commitments into practical action. From identifying priority locations and conducting wage gap assessments to developing improvement strategies. 2impact supports companies in embedding living wages into their broader human rights due diligence approach.