Identifying wage and income gaps is key in understanding the depth and extent of low wages and insufficient income in your supply chains. These requires a few key steps.
- Collect verified information about salaries paid to workers in your company and your suppliers, and estimate the income earned by farmers.
- Identify existing living wage and living income benchmarks relevant to your context.
- Benchmark against other wage and income indicators to create a complete picture of the situation and visualise the wage and/or income gaps in your specific supply chains.
The concept of living wage refers specifically to hired workers (e.g. factory workers, farm labourers, etc.), whereas living income refers to income earners (e.g. self-employed farmers). The end goal of living wages and living income is the same: achieving a decent standard of living for families. The Anker Methodology is a well-respected approach, that can be used for estimating a living wage or living income, as the cost of living for a family is the same regardless of how income is earned. However, estimating current wages is a very different activity than calculating actual incomes.
A living wage is 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. (Definition by Global Living Wage Coalition)
Visualise the gap between living and current wages in your supply chain in 4 steps:
1. Determine the living wage estimates that apply to the area of your supply chains
The living wage is specific to an area or region. There are a few leading international organisations developing living wage estimates, using different methodologies. When evaluating wages, it is crucial to have reliable benchmarks. The ALIGN consortium endorses the widely acknowledged Anker methodology.
Organisations generating living wage estimates
Global Living Wage Coalition
GIZ Living Wage Costing Tool
Asian Floor Wage Alliance
Living wage estimates have not yet been developed for every region and context. In absence of an established living wage estimate, you can also calculate the living wage yourself.
- The Living Wages around the World Manual for Measurement describes in great detail how to calculate a living wage.
- The Living Wage Calculation Tool developed by the World Fair Trade Organization allows you to estimate the living wage in the specific region/sector. It is based on the Anker methodology and simplified to meet the needs and resources of different users.
2. Assess the wage levels currently paid in your supply chains
Begin by disclosing and listing the salary scales of all employees, including all workers in the supply chain (lowest and highest salaries to first tier). Gathering wage data in a structured and systematic manner will be key to assessing living wage gaps. For this exercise you can use the Salary Matrix, originally developed by IDH and Rainforest Alliance. The Matrix allows suppliers to assess how the salaries (plus the in-kind benefits) they provide to their workers compare to living wage benchmarks.
It may be possible to find wage information in your own production facilities. However, some suppliers may be reluctant to disclose wage scales. Active engagement with suppliers will ultimately help them understand the importance of the issue and possible benefits, including improved productivity and reputation. Another strategy may be to team up with other companies and stakeholders and approach the supplier jointly.
3. Collect data on other wage indicators
Gathering additional data on wage levels will allow for comparison with the current wages. Some commonly used indicators include legal minimum wages, prevailing wages, collectively bargained wages, and poverty levels.
Another option is to gather the information locally, through in-country contacts, trade unions or local NGOs. Contact local (research) organisations to assist you further with this.
4. Visualise the gap
Generate a clear and easily understandable graphic that shows if and where wages fall short.
Wage ladders are an increasingly popular way to visualise the wage gap. A wage ladder compares wage levels amongst each other alongside other economic indicators for a country or region. To build a wage ladder all the indicators should be comparable to the living wage estimate and expressed in the comparable terms (e.g. per day or per month, before or after taxes, including or excluding in-kind benefits).
Wage ladder resources
Anker Methodology Manual
The Fair Wear Foundation Wage Ladder
Easy-to-use online tool that allows the wages paid at any factory to be compared against a range of wage benchmarks.
Wage ladders can be used for multiple purposes, including stakeholder engagement, awareness building, goal setting and supporting collective bargaining. Ladders can be powerful tools for negotiation. Moving away from long data sheets to a simple visual graphic will facilitate understanding in the negotiation process.
A living income is the net 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, transport, clothing, and other essential needs including provision for unexpected events. (Definition by Living Income Community of Practice)
Visualise the gap between living and current income in your supply chain in 4 steps:
1. Estimate the income a farmer needs to sustain his or her family in the specific context
A living income benchmark is the calculation of the cost of a decent standard of living in a particular place. It is crucial to have reliable benchmarks to compare with the actual income of farmers.
Organisations developing living income estimates
Living Income Community of Practice
Producing a solid base of living income benchmarks.
Global Living Wage Coalition
Estimating Reference Values for living incomes and wages using the Anker methodology
Estimating living incomes for various commodities and countries.
GIZ Living Income Gap Estimator
When a Living income benchmark is not available, the Estimator developed by GIZ provides an initial calculation of the gap between actual income and various income benchmarks available at ALIGN. It allows you to move further with information on the income of the household under consideration.
If a living income benchmark is not available for your sourcing regions, there are a few methodologies that can be used to calculate a living income estimate. However, make sure that whatever method you use, you have a validity check on that model through an independent and well-known organisation to avoid data errors and criticism upon implementation.
Approaches to calculating living income
In search of fair prices and premiums that close the gap between actual incomes and the living income, Fairtrade developed the Living Income Reference Price, with studies available for vanilla, cocoa, coffee and cashew. For when a LIRP is not avaialble, GIZ developed the Living Income Reference Price Estimator. The tool estimates the price required to achieve various income benchmarks following the ALIGN database, which contains different national and international poverty benchmarks that are retrieved and updated for different countries and regions on a regular basis.
2. Assess the income that the farmers earn in your supply chains
When considering income, as opposed to wages, it is important to recognise that the income that a family earns can come from multiple sources. Actual income refers to the total net household income. Independent earners often employ diversified income strategies to make ends meet. Income can be generated from various agricultural and livestock activities, and other off-farm income. Hence, the living income analysis goes beyond the income that a farmer earns from their primary activity to include all income sources of the farming household. The actual household income can be calculated through a number of methods. The Living Income Community of Practice guides users through several methodologies for Measuring Actual Incomes.
Resources that can help calculate actual incomes
In conducting research on living income benchmarks or actual incomes, skilled research partners are critical. Financial data is always sensitive, and credible reporting requires both skill and trust between the interviewer and interviewee. In addition, it is common that farmers do not keep financial records, so figures will often be estimated and may require validation using other data sources.
Approaches to calculating actual income
Self-reported income data from the farmer:
- Farmer surveys gather information on the amount of income from cash crops, other crops & livestock, off farm income, other sources of income (such as wage work or remittances), and the value of food produced at home (as this can reduce the cost of food for a family). Depending on the individual, there are varying degrees of data quality.
Calculated incomes from existing records:
- Cooperative or aggregator records can be a source of commercial data such as yields, farm size and farmgate price. Some organisations also track costs of production for the focus crop and use the share of its contribution to total household income to estimate household income.
- Farm record keeping data can be extremely helpful for understanding the actual costs of production. However, farm records are rarely kept in regions with high illiteracy and poverty rates. Getting accurate data may require capacity building through, for example, technical support.
Incomes from research:
- Research studies can provide a credible, third-party analysis of typical incomes in a region. If using third-party research studies, care must be taken to understand to what extent the results represent the farmers in your sourcing regions, how large the sample was, and the methods used to collect data.
- Impact assessments done in your supply chains and sustainability programs can yield the best quality data on farmer incomes.
Studies assessing actual household income
Assessing Coffee Farmer Household Income
A study by True Price, commissioned by Fairtrade International, 2017
Cocoa Farmer Income
A study by True Price, commissioned by Fairtrade International, 2018
Analysis of the income gap of cocoa producing households in Côte d’Ivoire
A study by KIT, prepared for the Living Income Community of Practice, 2018
Analysis of the income gap of cocoa producing households in Ghana
A study by KIT , prepared for the Living Income Community of Practice, 2018
Tools for assessing actual household income
3. Gather data on other income indicators that will allow for comparison with actual incomes
This is particularly important in the absence of an accurate living income estimate. The World Bank poverty lines and/or the national poverty lines, as well as the national minimum wage are globally understood indicators. Please note that the methods to calculate poverty lines are based on expenditures for survival, and do not represent the cost of a decent standard of living.
4. Visualise the gap
Generate a clear and easily understandable graphic that shows if and where actual household income falls short.
With a living income estimate, it is possible to evaluate the actual income of a farm households. An income ladder is a useful tool for visualising the gap between a living income estimate and other wage and economic indicators. In an income ladder you can visualise how different economic indicators in your identified supply chains and context compare amongst each other. You can use for example living income estimates, actual household income, legal minimum wage and/or poverty lines.
To build a wage ladder all the indicators should be comparable to the living income estimate and expressed in the same terms (e.g. per day or per month, before or after taxes, including or excluding in-kind benefits).
The following guidance manual and living income benchmarks give in depth insights on calculating and visualising the gap between actual and living income:
Examples calculating and visualising the living income gap
Guidance manual on calculating and visualizing the income gap to a Living Income Benchmark
Commissioned by the Living Income Community of Practice, 2020.
Living Income Report - Rural Côte d’Ivoire
Commissioned by the Living Income Community of Practice, 2018.
Living Income Report - Rural Ghana
Commissioned by the Living Income Community of Practice, 2018.
The income ladder can be used for multiple purposes such as stakeholder engagement, awareness building and goal setting. Ladders can be powerful tools for negotiation. Moving away from long data sheets to a simple visual graphic will facilitate understanding on the negotiation processes.