By Dr Marjoleine Hennis, Counsellor Social Affairs and Employment, Permanent Representation of the Kingdom of the Netherlands to the OECD and Prof Dr. Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct
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”.
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. In many sectors, plantations, factories and countries, this situation is the norm rather than the exception. Still, consumers are buying goods that are made using under-paid labor.
Imagine now that you are a CEO of a global company with suppliers in various countries. You would like to see to it that your workers, and those in the supply chains, earn a living wage. But how can you convince your suppliers to do so and according to which criteria? And how do you involve local governments or bring stakeholders to the table?
In recent years the responsibilities under internationally recognized standards have been clarified for supply chain responsibility vis-à-vis wages. Since 2011, the UN Guiding Principles for Human Rights and Business (UNGPs) and the OECD Guidelines for Multinational Enterprises (OECD Guidelines) both address living wages, partly by focusing on the angle of human rights, and partly by focusing on specific labor rights.
Let’s not be naïve, this is a very difficult issue to tackle for companies and their supply chains. However, in order to reach the Sustainable Development Goals and for companies to fulfill their corporate responsibility, enterprises should dramatically scale up and speed up their good practices towards living wages in global supply chains.
2. Treatment of living wages within international standards on responsible business conduct
Over the last ten years, living wage as part of corporate responsibility, has received increasing attention worldwide. Although it has gathered less consideration in the press than issues of child labor or forced labor, companies, NGO’s, and governments have increasingly put it on the (international) agenda. The globalization of production, consumption and information, that has drawn attention to all parts of the international production chain, has provided even more insight into the existing variations between wages within one supply chain. Some of those wages do not make for a decent living for workers and their families.
Many consider the concept of living wage to be more useful than the minimum wage. The living wage concept takes into account the local costs of living to cover basic needs for workers in order to take care of themselves, and to find their way out of poverty without being forced into structural overwork. Thus, on the one hand, it provides an instrument for achieving fair compensation throughout all segments of global supply chains. On the other hand, the concept leaves room for persistence of absolute differences in income within the same sector globally, as living wage is context dependent.
Living wage has come to play a role in the OECD Guidelines since its revision in 2011. The OECD Guidelines are the most comprehensive set of guidelines 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 OECD Guidelines and more non-OECD members are in the process of adherence. The OECD Guidelines are a binding multilateral commitment for governments. Although not legally binding for MNE’s, they represent a “firm government expectation of company behavior”. The OECD Guidelines have likewise been endorsed by business and civil society. Indeed, business has actively been engaged in the negotiations leading to their latest revision in 2011. This revision has been important for living wages, as it has led to considerable clarification in responsibilities of countries adhering to the OECD Guidelines, and their MNE’s with regard to this issue.
For the moment, attention with respect living wages issues seems to concentrate on the textile and garment sector in addition to a few select agricultural commodity sectors (tea production, for example). These sectors are probably most at risk when it comes to non-payment of living wages, however the under the Guidelines payment of living wages must be respected throughout all sectors. Additionally, under the Guidelines not only do companies have a responsibility to pay living wages within their own operations, they also should promote the payment of living wages throughout the whole of their supply chain. The 2011 revision of the OECD Guidelines incorporated the concept of due diligence which is the process by which companies can demonstrate they are acting responsibly in this respect. Finally, the Guidelines are equipped with a grievance mechanism, the National Contact Points (NCPs) which was further strengthened during the 2011 update. The combination of those new elements makes that the OECD Guidelines could be a unique and rather complete framework for promoting living wages.
As of yet, the OECD Guidelines have been under-utilized by stakeholders as a tool for promoting living wage. This may be due to a lack of information about the scope of the OECD Guidelines. This article seeks to deal with that by focusing on the responsibilities of business throughout the supply chain under the OECD Guidelines, with respect to living wages. It encourages business to do its due diligence in general, and on the wage situation in particular, throughout its supply chain. Dealing with living wages is not only an ethical or moral issue, but it is also good for business itself by creating a broader level playing field and avoiding the involvement in grievances brought under the OECD NCPs.
3. The basis for living wages in the OECD Guidelines
The OECD Guidelines have not developed their concept of responsible business conduct on living wages in an isolated manner. Their principles are firmly based upon the UN Declaration of Human Rights and ILO Conventions.
Firstly, 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. Moreover, it falls under the UNGPs which were endorsed by the UN Human Rights Council in 2011. The UNGPs build on three pillars: The duty of states to protect against human rights abuses by third parties, including business; the inclusion of the respect of human rights as part of corporate responsibility for all businesses; and greater access by victims to effective remedy, both judicial and non-judicial. The first two pillars introduce obligations concerning living wages for states and for businesses through reference to general human rights. More explicit references are also included, for example in article 2.12, where it refers to the fundamental labor standards of the ILO.
The OECD Guidelines state that enterprises have the responsibility to respect human rights. Among other things, this means that enterprises should avoid causing or contributing to the non-respect of living wages, and seek ways to prevent or mitigate adverse impacts on living wage as far as they are directly linked to their business operations, products or services by a business relationship, 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 in all parts of their supply chain.
Secondly, 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). In addition, living wage is mentioned in the ILO Constitution and the 2008 ILO Declaration on Social Justice for a Fair Globalization. This declaration has been the ILO’s response to globalization via the adoption of the Decent Work Agenda based on four, interrelated goals of employment creation, social protection, rights at work, and social dialogue.
More direct guidance for business is offered by the 2006 ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (ILO Tripartite Declaration). In this declaration the ILO invites governments of State Members of the ILO, the employers’ and workers’ organizations concerned and the multinational enterprises operating in their territories to observe, among others, the principle that wages, benefits and conditions of work offered by multinational enterprises should be no less favorable to the workers than those offered by comparable employers in the country concerned. Moreover, the Declaration states 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 basic needs of the workers and their families. Where they provide workers with basic amenities such as housing, medical care or food, these amenities should be of a good standard.
These two pillars of international engagements have formed the basis for the recommendations for MNE’s concerning living wage as laid down in the OECD Guidelines since its revision in 2011. The revision has resulted, among other things, in the inclusion of a recommendation on living wages in Chapter V on Employment and Industrial Relations. The OECD Guidelines are clearly inspired by the ILO wording of living wage as laid down in the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy. 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.”
Since their revision in 2011 the OECD Guidelines do not only concern investments anymore, but also cover global supply chains. MNE’s are recommended to adopt a comprehensive approach to risk-based due diligence to identify, prevent or mitigate actual and potential adverse impacts, where they have not contributed to that impact, when the impact is nevertheless directly linked to its operations, products or services by a business relationship. To put it differently, responsible supply chain management by MNE’s means, that even if the MNE’s themselves have not contributed to a negative impact, they are still expected to try to use their leverage on their suppliers to make them change their behavior. This includes taking reasonable steps by putting pressure on suppliers to make sure they pay a living wage. In high risk situations, the Guidelines recommend that MNE’s do more robust due diligence. For living wages this will probably be the case in many parts of the world and in many sectors such as garment and footwear.
This combination of references in the OECD Guidelines – directly, or indirectly– to living wages has thus resulted in a situation today in which multinational enterprises (parent companies and/or local entities) face a rather extensive package of strong expectations and recommendations by the 46 governments concerning their efforts in paying a living wage to their workers and using their leverage to let the enterprises in their supply chains do the same. The fact that the references now apply both to the company and its suppliers, for example in developing countries, increases the scope of their responsibilities. However, it is important to stress that the supply chain responsibility in the OECD Guidelines does not shift responsibility away from the supplier that causes the adverse impact, to the buying enterprise. In addition, the OECD Guidelines recognize that there are practical limitations on the ability of enterprises to effect change in the behavior of their suppliers.
4. How to integrate the concept of living wage into responsible business conduct?
In order to do no harm, MNE’s should carry out due diligence, including throughout their supply chain. The process of due diligence consists of three parts.
Firstly, there is the identification of the risks of negative impacts in the supply chain, the supplier risks and the internal risks. Enterprises should identify countries in their supply chain where wages have been identified as not meeting the basic needs of workers and their families and should, where possible, prioritize their engagements in countries with the greatest discrepancy between the actual wage and the wages necessary to satisfy basic needs.
In countries where the established standards are not met, the enterprise should also do a context assessment, for example by checking the proportion of wage workers under a collective agreement, for themselves and for their suppliers. The quality of collective bargaining and the lack of free association are critical factors contributing to the (non-) respect of living wages. But, even if good collective bargaining would drive up the wages, this may not be enough to ensure sufficient levels for the workers and their families, due, for example to (partially unpaid) overwork-practices or a high labor supply on the local labor market.
Moreover, even in a situation where the established hourly remuneration qualifies as living wage, its impact will be limited if other conditions are not met, such as the regular and timely payment of wages.
Additionally, companies should also review their purchasing practices. Sometimes the pricing, timing and changes in contracts contribute to suppliers breaching labor standards. Late payment of the factories could for example lead to late payment of wages to workers. All these elements should be taken into consideration. Living wage issues generally cannot be addressed in an isolated manner.
Secondly, potential impacts are to be addressed through prevention or mitigation, while actual impacts are to be addressed through remediation. This is done, for example, by encouraging collective bargaining agreements, by respecting national minimum wage mechanisms, or where both do not exist, through the engagement in capacity building.
Thirdly, the actions in prevention, mitigation and remediation of a company should be verified, reported, and communicated to stakeholders, workers and consumers.
So far, the OECD Working Party on Responsible Business Conduct has prepared supply chain due diligence guidance for MNEs in several sectors. These include the Due Diligence Guidance for Responsible Supply Chains in the Minerals Sector, and more recently the OECD-FAO Guidance for Responsible Agricultural Supply Chains. Additionally, guidance on responsible supply chains in garment and footwear sector will be published this year.
It is important to stress that due diligence on the issue of wages in the supply chain is not a zero tolerance approach. Due diligence should be risk-based, meaning that the level of due diligence applied corresponds with the level of risk identified. It may not always be possible for an enterprise to address all adverse impacts in its supply chain. The severity and probability of the adverse impact are the most important factors in determining the scale and complexity of the processes the enterprise needs to have in place in order to know and show that it is acting responsibly. The nature and appropriate extent of due diligence on wages in the supply chains will depend, furthermore, on individual circumstances and be affected by factors such as the size of the enterprise, the location of its activities, the situation in a particular country, the number of business relationships, the sector, and the nature of the products or services involved. While an enterprise’s degree of leverage does not alter its responsibility to identify and respond to adverse impacts, leverage is a key consideration of how businesses should prevent and mitigate adverse impacts.
Due diligence should also be dynamic, meaning that it can be tailored over time to the operating context or circumstances and should be applied with flexibility. It should include a process of learning, through constructive engagement with business partners, workers and stakeholders. When risks on adverse impact are brought to the enterprise’s attention, due diligence systems should be adjusted accordingly, in order to enhance the identification of similar risks in the future.
Although enterprises retain individual responsibility for their due diligence, supply chain due diligence can be more effective when conducted in collaboration with others, including with other enterprises at a sector-wide level, with workers, with home and host governments, and with civil society. For example, due diligence on wages ideally would be conducted in consultation and collaboration with trade unions and representatives of workers’ organisations.
Enterprises should work towards progressive improvements. In practice, this means that an enterprise may not be able to implement all of the recommendations on wages in supply chains at once, but should systematically work towards their full application. Enterprises should be transparent on their existing due diligence practice and their plans for progressive improvement.
5. It pays to pay a living wage
If the business case for taking these actions is made clear for enterprises, with respect to risk management, reputation and productivity gains, they will be more likely to act 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. Below living wages also increase the risk of labor unrest which can lead to the disruptions of operations and reputational damage to companies, particularly in this age of mass communication. Lastly the rise in ethical consumerism means that companies can access an important market share and stand to profit by behaving responsibly.
Additional incentives for business to pay a living wage can be found in (financial) incentives by national governments adhering to the OECD Guidelines, which are set up to encourage them to comply with the Guidelines; marketing opportunities for business and attraction of consumers willing to pay for goods resulting from responsible business practice; and, lastly, reducing harm through business operations on a global scale.
6. Good practices and remaining challenges
A reality check is needed. Unfortunately, getting to a living wage is not as simple as $1 dollar more on the price, equals $1 dollar more in salary for the workers. So when you pay that dollar extra for your T-shirt, you should not expect it to end (entirely) in the pocket of the worker. As the Secretary General of the International Organization of Employers, Linda Kromjong, states: “Buyers are not in a position to dictate wages unilaterally, especially when rates relate to supplier companies in a second or a third tier position. Supply chains are not direct linear arrangements; as we have noted above, they are complex webs of interaction. It is naive to imagine that buyers can pour money in at one end and expect it to be directly distributed to supply chain workers through higher wages at the other. Experience tells us that wage setting is most effective when it takes place at the national level with the full involvement of the representatives of the social partners. Nevertheless, many companies are proactively engaged in promoting decent wages at their suppliers. Contrary to reports that international companies lobby for low minimum wages, joint efforts in Cambodia by international brands in the garment and the textile industry and IndustriALL Global Union have shown the opposite to be the case.” 
Indeed, many businesses are already undertaking action in order to ensure a living wage for their workers and those of their suppliers. Many of these initiatives bring together several stakeholders and seem to be 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. A good example is the Action Plan on Living Wages, which was the result of a multi-stakeholder consultation process that culminated in the European Conference on Living Wages (Berlin, 2013).
In the textile industry, for example, there is ACT (Action, Collaboration, Transformation) a global framework on living wage that brings together all relevant stakeholders. According to its website ACT is based on the awareness that the payment of a living wage should not be limited to certain brands but should apply to all workers.  ACT aims to accomplish this by establishing industry-wide collective agreements on wages in key garment and textile sourcing countries, supported by manufacturing standards and responsible purchasing practices. 15 brands, including H&M, Esprit and C&A, participate in this initiative. These companies deserve praise for engaging in this effort.
A good example in the food sector is the Malawi Tea 2020 Revitalization Program. Under this program a Memorandum of Understanding (MOU) was developed which commits to payment of living wages on tea plantations and living income on smallholder farms in Malawi by 2020. Among the participating partners are tea producing companies, tea buying companies and retail, standards and certification organizations, and tea trading companies. This MOU emanates from an earlier MOU of ISEAL signed by organizations (Fairtrade International, Rainforest Alliance, UTZ Certified, Forestry Stewardship Council, Goodweave and Social Accountability International), which they have committed to adopt a common definition of living wage and apply a common methodology to estimating living wage levels, as developed by former ILO economist Richard Anker. In order to convince actors such as retailers and brands to participate, the program has calculated the needed increase in price in the UK for a typical tea box of 80 teabags in order to generate sufficient funds to pay a living wage for workers in the Malawi-tea sector: merely one cent.
7. Scaling up & speeding up good practice
These initiatives are all to be praised for having paved the way forward in a new and challenging territory. The considerable participation by business in these initiatives demonstrates that business is willing to act but that it requires common standards and guidance. Furthermore in order to be really effective, these initiatives would need to be scaled up dramatically to other sectors, and to other countries. The question is, how?Firstly, awareness and understanding of the responsibilities is important. Companies have to understand the individual responsibilities they have under internationally recognized standards of the ILO, the OECD and the UN concerning wages in their supply chain. It helps if they see the business case for this in terms of risk management, reputation and productivity gains. Once they do, companies should use their leverage and take steps to promote living wages in their supply chains. These new responsibilities should also be reflected in sectoral codes of conduct, of which many currently ignore the tricky living wage issue. Secondly, methodologies should be more fine-tuned and consistent. 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. Moreover, wages should also be regularly adjusted and be determined based on negotiations with social partners. The lack of one or more of these factors is likely to result in persistence of differences in wages throughout supply chains and within countries, while frustrating the good intentions of all stakeholders. Promising initiatives that focus on the development of a common approach to the measurement of living wages, such as that of ISEAL and Wage- Indicator, should receive support.Thirdly 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. Tackling the root causes of low wages is necessary. The gaps between living wage and current wages are so large in certain jurisdictions that individual companies will not be able to bridge the gap even when they are the only company sourcing from a factory. In addition, there will be pressure from colleague-suppliers and employers’ organizations to stay “in line”. And, 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. Therefore, the comprehensive approach seems the only viable way towards sustainable living wages.. A reasonable step would be to start with, or engage in, sector-wide collaboration between companies, suppliers, employers’ organizations, trade unions and governments. This includes processes to set an adequate national minimum wage. The Tea MOU and ACT are good examples of this sector-wide approach. Moreover, companies should support collective bargaining mechanisms and effective worker institutions, in particular trade unions. They should enable factories to incorporate living wages as part of their human resource policy to motivate, attract and keep people.
Those are not simple tasks for companies, but are not impossible either. The OECD Guidelines facilitate companies in these efforts by offering guidance for the due diligence process and convening actors to promote a level playing field. In addition, companies can turn to (local) governments who, according to the OECD Guidelines and UNGPs have the duty to protect human rights, including the right to a living wage. Collaboration with governments can create the conditions for promoting living wages for a larger group of workers.
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 an even broader collaboration which is sector-wide and includes not only suppliers and governments, but also trade unions, NGOs and employers’ organizations. Some promising initiatives have been successful, such as the ACT process and the Malawi Tea MOU. The companies involved in these initiatives deserve praise for their effort. But what about the other 80.000 multinationals? These efforts need to be scaled up and sped up dramatically. Other companies should join. Similar initiatives should be introduced in other sectors and other regions. Any company that reflects on its possible contribution to the SDG’s should look at this issue with high priority!
 A worker interviewed for Oxfam study ‘In work but trapped in poverty’. http://policy-practice.oxfam.org.uk/publications/in-work-but-trapped-in-poverty-a-summary-of-five-studies-conducted-by-oxfam-wit-578815, the worker’s name was changed to protect her anonymity.
 Universal Declaration of Human Rights, Article 23.3
 OECD Guidelines, II, art A2
 OECD Guidelines, Chapter IV
 OECD Guidelines, IV-2, 3
 ILO Tripartite Declaration, art. 33
 ILO Tripartite Declaration, art. 34
 OECD Guidelines for Multinational Enterprises, 2011, Chapter V, 4B
 OECD Guidelines, General Policies, art A10, 11 and 12
 Even if the strong expectations mentioned above do not apply, the Guidelines still demand that enterprises encourage business partners, including suppliers and sub-contractors, to apply principles of responsible business conduct compatible with the Guidelines (A13), and to inform workers and consumers about the company policies including their adherence to the Guidelines on initiatives they have taken to integrate social concerns according to the rules of disclosure (chapter III and chapter V, 2C), and resulting engagement in achieving a living wage throughout enterprise groups.
 OECD Guidelines, Chapter General Policies, paragraph 12
 OECD Guidelines Chapter General Policies, Commentary paragraph 21
 OECD Due diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector, pp 93) DRAFT
 December 2015
 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.
See, for example Anker, R., Estimating a living wage: a methodological review, ILO 2011.
 Anker, R., Anker M., Living wage for rural Malawi with Focus on Tea growing area of Southern Malawi, Report prepared for Fairtrade International, Sustainable Agriculture Network, Rainforest Alliance and UTZ Certified, January 2014.
 Vaughan-Whitehead D., Speech at NCP–NL conference on living wages, The Hague, October 2015.
 Guiding Principles on Business and Human Rights (2011)
 Estimate from Sustainable Stock Exchanges Initiative, 2014 report on progress