Investment Institute
Sustainability

Why living wages should be considered a driver of human capital value, not a cost

  • 06 September 2023 (7 min read)

  • After a decade of poverty reduction, COVID-19 and post-pandemic inflation have combined to erode real wages. Minimum wages now fail to reflect this reality
  • Paying decent wages is a powerful tool in reducing poverty and a key pillar of the Universal Declaration of Human Rights. Living wages are also a bedrock for numerous UN Sustainable Development Goals
  • Salaries can be considered as a cost but at the same time as an investment in human capital and social development
  • Investors should consider the risks of structurally decreasing performance, costly strikes and potential financial losses as they engage with companies to promote living wages policies

“Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.” Article 23 of the United Nations Universal Declaration of Human Rights.1

On the face of it, salaries and bonuses are a business cost – that’s how they appear on the income statement – and companies tend to want to reduce costs. But investors should note that ‘living wages’ which fairly value employees are best seen as investments in human capital that can help build resilience into supply chains, and the wider economy.

By following the fundamental principle of fair compensation, companies can ensure workers receive pay that is sufficient to meet their basic needs and lead a decent life. Fair wages can foster a sense of respect, empowerment, and loyalty in a workforce which, in turn, can translate into increased productivity, reduced turnover rates, and improved overall job satisfaction – which can potentially be beneficial for the bottom line, and for investors. Beyond the creation of a positive work environment, living wages have been shown to alleviate poverty, reduce income inequality, and enhance social mobility.2

This combination of effects can then foster economic growth, as financially secure individuals are better able to participate in consumer markets, stimulate local economies, and invest in their own personal and professional development.

 

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