Paying the living wage is good for business

In 1914, Henry Ford more than doubled workers’ wages to $5 a day and shortened the workday to eight hours

In response to a number of EOS clients becoming increasingly focused on cost of living concerns, EOS integrated cost of living engagements into its stewardship programme during 2022. In particular clients want to know how the companies in which they invest are providing fair, living wages to their workforce in conjunction with good quality employment.

But why are clients so keen for us to engage on this?

Life has become a lot more expensive in the past 12 months, with soaring inflation and the resulting cost of living crisis posing considerable challenges for companies, suppliers and customers.

Employees across the income spectrum are feeling the squeeze and the picture is particularly bleak in the UK – from where I write – for the 4.8m workers who are earning a wage that doesn’t meet actual living costs, according to research from the Living Wage Foundation published in September 2022.

The research states that those households are having to make ‘heat or eat choices’, with some having to cut back on both. This makes the current higher living costs a daunting proposition that has no sign of easing any time soon.

Financial worries can have a long-term impact on an individual’s mental and physical health, creating a link between financial pressure and employee performance.

Workers under financial pressure are unlikely to perform at their best, with more than 80% of workers saying money worries affect their performance in a survey conducted by YouGov. As a result, businesses can face reduced productivity, higher employee turnover and increased recruitment and training costs at a time when they can least afford it.

Research points to the economy-wide benefits of a larger number of people being paid a living wage. Increasing the cost of labour creates more job demand, opportunity to restore bargaining power to workers and control over their economic conditions.

More broadly, the payment of living wages can also offer a route out of working poverty and a partial solution to the broader challenge of inequality.

The impetus to end poverty in all its forms is enshrined in the UN’s Sustainable Development Goals (SDGs) through SDG 1, while SDG 10 is to reduce inequality within and between countries. There is growing recognition that wage poverty poses a significant barrier to progress on other SDGs, such as gender equality, zero hunger and access to health care and education.

Clear business case

History reminds us that providing higher wages and decent working conditions is good for business.

In 1914, Henry Ford more than doubled workers’ wages to $5 a day and shortened the workday to eight hours. Although initially met with scepticism by his competitors, the resulting boost in productivity and employee loyalty which followed made the industry follow his example. And the Monday-to-Friday work week became standard practice.

There are early signs that providing living wages is good for business. PayPal attributes much of its 2019/2020 growth to the decision to increase the net disposable income of the lowest-paid employees to 16 % of the average employee’s pay (from 4-6 % at market wage rates). It wanted to ensure that employees could make ends meet as well as save for future emergencies.

In the months following PayPal’s decision, customer satisfaction ticked up, employees were more engaged and the company’s stock continued to soar. Many factors drove this growth, like the rise of e-commerce, but an increase in worker productivity was regarded as instrumental by the company’s president and CEO, Dan Schulman.

The business case for paying employees the living wage is clear. With an appropriate transition to address potential impacts on short-term profitability, paying a living wage is good for business, workers, and ultimately wider stakeholders, including communities and governments.