In partnership with the International Foundation for Valuing Impact (IFVI), the Value Balancing Alliance (VBA) released the public exposure draft on adequate wages as part of their impact accounting methodology. This draft addresses the critical issue of how to value the social impact of paying (in)adequate wages.
Workers payments have a significant effect on their well-being. Adequate wages contribute to an individual’s level of well-being by supporting the ability to meet their basic needs, whereas inadequate wages fail to do so, negatively affecting their quality of life.
Therefore, the methodology introduces two distinct impacts on workers well-being caused by wages. On the one hand, the "remuneration impact" refers to the positive effect wages have on workers' well-being by providing income. On the other, simply earning a wage does not ensure it is sufficient for a decent living of an individual and their family. This requires at least a wage payment at or above a living wage threshold. Thus, the "living wage deficit impact” aims to illustrate the negative effect of inadequate wages. Living wages are central for understanding the impacts of wage payments. As of 2020, over one billion workers globally earn wages that do not support a decent standard of living. This issue is especially critical given the importance of living wages as a human right, as highlighted in the UN Declaration of 1948, that states that “everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.”
The relationships between wages and worker well-being
In the case of remuneration impact, the methodology considers the effect produced by wages as a direct source of income, which supports workers' well-being by enabling them to meet essential needs such as food, housing, and healthcare. Income also contributes to psychological and social well-being, allowing workers to participate in social life with dignity and reduce financial stress. Following the marginal utility logic, the methodology also considers that the positive impact of income diminishes as wages increase.
Conversely, when workers are paid below the living wage, they suffer well-being losses. This negative impact is both empirically supported and conceptually tied to the previously mentioned consideration of a living wage as a human right as wages would be preventing workers from maintaining a decent standard of living.
Expressing the well-being effects of adequate wages in monetary terms
When expressing the value of adequate wages in monetary terms, the methodology acknowledges that 1€ of wage does not directly equal to 1€ of well-being creation.
Instead, it uses a "well-being utility of income" (WUI) approach, which considers wages as a means to achieve well-being rather than an end in themselves. This approach measures the effect of changes in income on well-being, typically using subjective well-being as the outcome measure, even though other methodologies might consider different well-being dimensions -e.g., health- depending on the use case.
In this methodology, value factors are derived from the logarithmic relationship between GDP per capita and life satisfaction, and the monetary value of changes in life satisfaction is quantified using the concept of a WELLBY-a one-point change on a 0-10 life satisfaction scale for one person for one year.
The logarithmic relationship reflects the between-countries inequality, as in lower income countries, changes in wages have a greater impact on well-being that in high income countries.
In addition, in the case of remuneration impact, to address within-countries inequality, the methodology incorporates the diminishing marginal utility of income -the idea that the well-being impact of wages decreases as income increases- with inflection points.
Raising the bar towards adequate wages
Paying an adequate living wage is “one of the conditions for universal and lasting peace based on social justice” according to ILO’s senior economist Patrick Belser. According to that same organization, “it motivates staff to work more and better, and contributes to create peace in the workplace and higher productivity”, so it also benefits employers.
However, they say you can’t manage what you don’t measure. Luckily anyone can apply the methodology by using the value factors provided in Appendix B of the draft methodology, which is publicly accessible.
Analyzing wage effects and expressing them in monetary terms is a powerful tool for decision-making. Most importantly, this approach helps illustrate the well-being losses experienced by employees of companies that do not pay a living wage. It aims to incentivize these companies to pay wages above the benchmark, ensuring their workers and families can meet their basic needs for a decent life.
Additionally, this methodology highlights the extra value of generating employment in low-income areas as a lever for economic development and prosperity, while still recognizing the positive value of stable jobs in developed regions.
The methodology is currently undergoing revisions to integrate feedback received during the public comment period and from members of the Value Balancing Alliance following the latest piloting exercise. Any further updates will follow the process outlined in the Due Process Protocol and will be publicly shared in the coming months.
Authors: The Methodology Team at VBA
Francisco Ortin Cordoba Senior Manager, Impact Valuation Methodology Development & Business Applications | Dr. Michael Verbücheln Director, Methodology Development
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