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Facing the gap: how to meet your Living Income commitments

2021 was a defining year for the concepts of living Income and wage. By the end of 2021, Aldi, Lidl, Unilever and Olam – major actors in the international food and nutrition market – have launched initiatives and/or made commitments to paying a living income to their producers and workers. Given the market dominance of these actors, these commitments can be seen as indicative of the mainstream momentum that living income is gaining.

The growing interest in the topic of living income was also echoed within our work for clients in the previous year. For example, we assisted Fairtrade International in determining living income references prices for a number of coffee-producing countries, of which the Colombia study was published last year. We also started working with IDH to develop a Living Wage Analytical Tool, which can assess whether a production facility has a living wage gap, and if so, recommend the best interventions to improve worker remuneration.

However, while we see that companies are increasingly taking on living income and wage commitments, we also see that many are unsure of how to meet these commitments. Some companies lack clarity of the severity of the gap in their supply chains, while others are unsure of what the most efficient way to close the gap is, as simply paying the living income/wage differential is not feasible for them if they wish to remain competitive.

To help companies overcome these obstacles, we have created two solutions: the NewForesight Living Income Benchmark Methodology and our Fair Value Tool.

NewForesight’s Living Income Benchmark Method

A reoccurring issue working with our clients on living income over the past years have been the lack of a living income benchmark for which our clients could compare incomes against. Simply put: Without a benchmark, companies do not know if they even face a gap, or the severity of it. A living income benchmark estimates the costs of a basic but decent life for a representative household in a region or sector. Because living costs can vary wildly between geographies, and since living income benchmarks traditionally are expensive to establish, benchmarks are not available for many regions. This was a concrete challenge faced by our client Palladium, one of three organizations commissioned to manage the Dutch government-funded Challenge Fund for Youth Employment (CFYE), which aims to create decent employment for 200,000 youths across Africa and the Middle East. To measure if the jobs secure the employee a living wage, a living wage benchmark is needed. Therefore, NewForesight set out to develop a scalable, adaptable, and accessible method to establish living income benchmarks.

By utilizing international databases and sources that are publicly available in all countries, and supplementing with primary data collected through our local partner network, we operationalized the guidelines of the Anker Methodology in such a way that we can develop credible, yet resource-efficient benchmarks in a scalable manner. The model also allows for application and comparability across regions, as it includes pre-defined training materials, standardized data capture formats, and modeling templates to calculate the costs of living.

The model was successfully utilized to establish living wage benchmarks in Uganda and is now being used by CFYE to establish benchmarks in the 21 countries across the MENA region.

We believe this is an example of how determining a credible benchmark for a region is an essential first step in enabling a living income for producers and workers, since it identifies the existence and magnitude of a living income gap and can measure the efficiency of any interventions.

This brings us to the follow-up question, which is how to best close a living income or wage gap. Many levers exist here, from micro-level productivity-enhancing interventions to macro-level collective bargaining agreements to determining and paying a fair price. Most of the time, no single intervention alone can close a living income or wage gap. Understanding the different drivers of the living income or wage gap requires a careful holistic analysis that considers (amongst others) market forces, pricing, productivity, time allocation, cost of production. Only when the different drivers have been identified, a complimentary set of interventions are considered and combined in a holistic strategy aimed at effective closure of a living income or wage gap. This challenge was the essence of a request we helped another of our clients with.

Understanding the fair price of products

In the globalized markets of today, costs of goods and pricing are the main competitive elements that determine a company’s performance. In the production and distribution of its goods, companies engage in complex, international supply chains, along which value is added and captured by a host of diverse supply chain actors and producers engaging with multiple international off takers. Often, we see that in producing countries, the most marginalized people are the ones producing the raw materials that constitute the main ingredients in many of our consumer goods. These producers tend to only capture a few percent of the final retail value, with most of the value being captured by actors outside of the producing country. With that in mind, it seems just for a company to consider the role that pricing can play in closing a living income or wage gap for its producers.

When considering price increase to close the living income/wage gap, it is often evident that this is not feasible due to market competition, nor is pricing the most efficient lever to close the living income/wage. The reality is that producers’ lives are complex and companies have limited room to increase prices in a market space that competes on lower prices. As such, multiple levers will need to be considered: perhaps productivity is too low, or other barriers might exist which disallows producers from sufficiently capitalizing on their production. To explore these opportunities, we have created our Fair Value Tool.

Our Fair Value Tool can assess the severity of the living income/wage gap, and the extent to which a fair price can close the gap, accounting for market realities. This is calculated based on the producers’ productivity, production costs, time dedicated towards producing the respective product, and cost of living. Apart from calculating a fair price the Fair Value Tool also identifies improvement areas in sourcing, productivity, cost of production etc. to further close the living income/wage gap.

The primary outcome of the tool is that it generates actionable insights based on a host of production-level parameters, which form the basis of a holistic strategy targeted at closing the living income/wage gap through multiple interventions. A secondary outcome of our tool is that it offers an unbiased, transparent fair price that all supply chain actors can endorse. In seeking this endorsement, the tool can function as an easy-to-use negotiation instrument for supply chain actors and/or employees. Through such a consistent and data-driven approach, the tool enables continued monitoring and evaluation of the current progress your company is making towards fair pricing across different products and origins.

We have used the tool in collaboration with an international cosmetics retailer, applying it to understand the fair price of various raw materials across six different international supply chains in Africa, Asia and Central America. The products varied wildly, from wild harvested materials like shea nuts, to recycled plastics and factory-produced textiles.

These fair prices are now used as a first step for our client to discuss with their suppliers of how to achieve a living income. This step entails a critical component of a holistic strategy that is being formulated with our client, which ultimately aims to achieve a living income for producers.

We hope our work in living income of the past year has inspired you and has showcased an understanding of how NewForesight can assist organizations in understanding what ensuring a living income means for your specific cases, but also how this knowledge can be translated into closing living income gaps through a market-driven solution.

If you have similar ambition, contact our Living Income lead Daniel Pedersen at daniel.pedersen@newforesight.com and schedule an introductory call.

 

Concept Explanation
Living Income A living income is defined as “The net annual income required for a household in a particular place to afford a decent standard of living for all members of that household. Elements of a decent standard of living include: food, water, housing, education, healthcare, transportation, clothing, and other essential needs including provisions for unexpected events”. (Global Living Wage, 2022).
Living Wage A living wage shares much of its definition with Living Income, except that it is applied in the context of hired workers (in factories, on farms, etc.), whereas living income is discussed in the context of any income earner, such as self-employed farmers.
Fair price A fair price is the price that enables a producer or worker to reach a living income or wage, provided that the working hours are reasonable and working conditions are safe and healthy. For producers, the fair price is calculated based on the producer’s production costs, cost of living, and time dedicated towards producing the respective product. For workers, it is based on hours worked and cost of living.

In many cases, the company wanting to pay a fair price only buys a portion of the total produce of a producer. In this case, a pro-rated approach is used to calculate the fair price, which allows a company to take its share of responsibility in achieving living income for a producer selling to multiple off takers.