How should pay be determined? Study points to living wage as notable initiative on global stage

The article, published in GV-Executive, discusses the concept of a living wage, which came to prominence due to United Nations’ 2030 Agenda.
30 November 2022
How should pay be determined? Study points to living wage as notable initiative on global stage

“A living wage is not the same as a minimum wage. It needs to meet the essential needs of workers and their families while respecting indicators of equity and meritocracy.” This is stated by Professor Jorge Cavalcanti Boucinhas Filho of Fundação Getulio Vargas’ Sao Paulo School of Business Administration (FGV EAESP) in a recent paper called “Como Remunerar o Trabalho?” (“How Should Pay be Determined?”). The article, published in GV-Executive, discusses the concept of a living wage, which came to prominence due to United Nations’ 2030 Agenda.

The concept of a living wage goes beyond the minimum wage, which covers only workers’ most basic needs, and also encompasses indicators such as equity, productivity, experience, education and a series of other factors that consider professionals in a holistic way.

Boucinhas Filho highlights four fundamental values and principles underpinning the idea of a living wage:

- Work should be a source of dignity;

- Labor is not a mere commodity;

- Poverty anywhere is a threat to everyone’s prosperity;

- All people have the right to pursue their material well-being in conditions of freedom and dignity, economic security and equality of opportunity.

Accordingly, the duration of work and remuneration are two essential points to understand autonomy of will in Brazilian labor legislation. Boucinhas Filho emphasizes some issues in this area, such as minimum salaries in different professions, negotiations, COVID-19, the war in Ukraine, high inflation and increased working from home.

Differences between minimum wage and living wage

These concepts are similar but not the same. A minimum wage is a figure established by law, based on the cost of living, and deemed to be sufficient to allow citizens and their families to get by in dignity. A living wage also implies adequate remuneration for work performed, in line with the specific kind of work. The concept is championed by the UN Global Compact Brazilian Network and UN Women, which want to ensure that all workers receive a living wage, including employees and contractors. They are attempting to engage the entire supply chain in developing living wage targets.

A minimum monthly salary was established in Brazilian legislation, in article 76 of the Consolidated Labor Laws, and this article has never since been modified. However, when the new Constitution was established in 1988, the monthly salary underwent some changes with the aim of benefiting workers. The monthly salary applies to all men and women, in both urban and rural areas, who work full time. The idea is to allow them to meet their basic needs for food, housing, clothing, hygiene and transport, in a given time and region of the country.

According to Boucinhas Filho, an estimated 327 million workers around the world are paid the local minimum wage or less. This represents 19% of all workers in the formal labor market. Thus, around a fifth of the world’s workers are only paid enough to scrape by, or not even that, and certainly not enough to ensure a dignified life.

Although the main objective of minimum wages is to protect workers from excessively low pay, they can also help reduce pay and income inequalities. This depends on several factors:

- The minimum wage’s effectiveness; 

- The established level;

- The characteristics of people who receive it.

However, have these goals actually been met? We need to keep in mind Brazil’s economic and social conditions and the types of workers involved: those employed in the formal labor market and the self-employed. During the pandemic, the number of workers in the informal economy soared and the minimum wage policy is an empty promise as far as these people are concerned.

In light of this discouraging situation for workers and for the Brazilian economy, the UN Global Compact Brazilian Network and UN Women launched the Living Wage Movement, which aims to ensure that all workers receive a living wage, including employees and contractors. To this end, the movement is attempting to engage the entire supply chain in developing living wage targets.

Living wage

In addition to the basic needs of each individual, it is up to employers to be sensitive enough to pay more to those who are experiencing difficulties and have greater needs, giving them the opportunity to rise to better positions. This type of approach increases employees’ self-esteem and retains talent, in addition to other benefits.

Here are the benefits for companies that pay living wages: 

- Reduced staff turnover: This indicator may fall 41% at small enterprises and 19% at large ones, cutting recruitment and training costs;

- Improved motivation and productivity: 80% of employers and 75% of employees say their quality of work improved following the introduction of a living wage;

- Reduced absenteeism: A US$1 increase in the real minimum wage leads to a reduction of between 19% and 32% in sick leave;

- Better financial results for companies: PayPal largely attributes a 15% increase in revenue and 28% increase in profits from 2018 to 2019 to its decision to raise the wages of low-earning employees;

- Better-quality and more reliable suppliers

- Better corporate reputation: A survey of companies that implemented a living wage, supported by accreditation organizations, shows that 78% of them subsequently perceived an improvement in their corporate reputation;

- Lower risk and easier fundraising: There is a tendency for some investors to consider living wages in their assessments.

- Compliance with regulations: There are some legal standards that are related to fair wages and civil society organizations are working to include this subject in the European Union’s Corporate Sustainability Reporting Directive. 

Dimensions of an expanded living wage

- Payment of wages: regular, formal and full payment to workers;

- A living wage: allowing a minimum acceptable standard of living;

- Prevailing wage: abiding by minimum wage regulations;

- Pay for all hours worked: amount compatible with equivalent companies in the same sector;

- Payment systems: balanced pay structure/breakdown between base pay, bonuses and additional benefits; 

- Communication and social dialogue: individual negotiation (via individual contracts) and collective bargaining between employer and workers’ representatives, freely accepted at the company;

- Discrimination and pay disparities: equal pay system that does not lead to wage discrimination or generate unwarranted, very high and very fast-growing wage differentials within the company; 

- Real pay: pay is adjusted in line with Brazilian inflation; 

- Bonuses related to corporate results: higher pay in line with growth in the company’s sales and profits;

- Payroll cost: changes in pay do not lead to a drastic reduction in payroll costs as a proportion of total production costs or percentage employment; 

- Work intensity, technology and professional development: this is related to professional growth and the development of skills and competencies performed day to day.

According to Boucinhas Filho, no salary below the minimum wage can be considered a living wage. “Pay should take into account the basic, essential needs of workers and their families and also reflect equitable relationships, productivity, skills, experience in different functions, experience at the company and education (provided that this does not result in undue discrimination),” he says.

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