Working hours are not excessive

Guidance and resources

This Base Code clause was revised with effect from 01 April 2014.
Audits are now expected to be conducted to this standard.
INTERACTIVE LEARNING TOOL
Find out why the clause has been revised, what has changed and what you need to do:
Learn about the revised wording

Guidance documents
ETI working hours clause revision, Interpretation: what does it mean? (pdf)
ETI working hours clause revision, Guidance: what do I need to do? (pdf)
Summary slides of the Guidance (Powerpoint presentation)
China working hours briefing
Translations of guidance material (Afrikaans, Arabic, Bengali, Chinese, English, French, Hindi,
Italian, Spanish, Thai, Turkish)
Frequently asked questions
ETI Base Code provision 6 (as of 1 April 2014):
Working hours are not excessive
6.1 Working hours must comply with national laws, collective agreements, and the provisions of
6.2 to 6.6 below, whichever affords the greater protection for workers. 6.2 to 6.6 are based on
international labour standards.
6.2 Working hours, excluding overtime, shall be defined by contract, and shall not exceed 48 hours
per week*
6.3 All overtime shall be voluntary. Overtime shall be used responsibly, taking into account all the
following: the extent, frequency and hours worked by individual workers and the workforce as a
whole. It shall not be used to replace regular employment. Overtime shall always be compensated
at a premium rate, which is recommended to be not less than 125% of the regular rate of pay.
6.4 The total hours worked in any 7 day period shall not exceed 60 hours, except where covered
by clause 6.5 below.
6.5 Working hours may exceed 60 hours in any 7 day period only in exceptional circumstances
where all of the following are met:

this is allowed by national law;

this is allowed by a collective agreement freely negotiated with a workers

organisation representing a significant portion of the workforce;

appropriate safeguards are taken to protect the workers health and safety; and

the employer can demonstrate that exceptional circumstances apply such as

unexpected production peaks, accidents or emergencies.

6.6 Workers shall be provided with at least one day off in every 7 day period or, where allowed by
national law, 2 days off in every 14 day period.*
*International standards recommend the progressive reduction of normal hours of work, when
appropriate, to 40 hours per week, without any reduction in workers wages as hours are reduced.

Key international (ILO) conventions

C1 - Hours of Work (Industry) Convention, 1919
C30 - Hours of Work (Commerce and Offices) Convention, 1930
C106 - Weekly Rest (Commerce and Offices) Convention, 1957
C14 - Weekly Rest (Industry) Convention, 1921
The Hours of Work Conventions require - subject to a wide range of exceptions - that working
hours shall be limited to eight hours a day and forty-eight hours a week.
The Weekly Rest Conventions - again subject to exceptions - provide that workers should be
entitled to one full day's rest every week.

Frequently asked questions

1. Do I need to start using the new wording straight away?
You may start using the revised wording whenever you wish, but we anticipate that companies will
need time to make the adjustments outlined in the Guidance document before they can expect
to fulfil the expectations of the revised wording. For example, contracts and HR policies may need
to be re-written, work schedules readjusted, discussions held with workers representatives etc.
We suggest that December 2014 would be a realistic date by which companies would start using
the revised wording and auditing against it.
2. What are the maximum contracted or required hours under the ETI Base Code?
Contracted working hours refer to the number of hours which a worker may be required to work
per week by his or her employer. This will normally be fixed at no more than 48 hours per week,
unless a lower figure is set by national law or a collective agreement. Where averaging is allowed,
there may be some variability on required working hours, with the proviso that the average
required hours will not exceed 48 hours per week and the total number of hours actually worked
will never exceed 60 hours per week, unless there are exceptional circumstances, it is allowed by
national law, covered by a collective agreement and appropriate safety safeguards are in place.
3. Which standard should be applied if the ETI 60 hours limit on weekly working hours is
stricter than country law?
The 60 hours per week limit on all hours worked in a week set by the ETI Base Code will be
stricter than national law in some cases (for example, national law may not set maximum limits on
weekly working hours). In these cases, the 60-hour limit should apply. It should be noted that this
limit includes all overtime, which must be voluntary and used in accordance with the Base Code.
The 60-hour limit may only be exceeded if all of the following conditions under 6.5 are met:

this is allowed by national law;

this is allowed by a collective agreement freely negotiated with a workers

organisation representing a significant portion of the workforce;

appropriate safeguards are taken to protect the workers health and safety; and

the employer can demonstrate that exceptional circumstances apply such as

unexpected production peaks, accidents or emergencies.

4. What is considered to be a significant portion of the workforce?

This will depend on the circumstances. National law may have specific provisions relating to
collective agreements on working hours or bargaining in general. This may include provisions
which determine what are the procedural requirements for agreements which provide for
derogation from working time rules (for example, Regulation 23 of the Working Time Regulations
1998 which governs working hours in the UK). Where present, these should be followed in
determining this issue. If there is no relevant rule, then this provision should be interpreted in light
of the fact that it is aimed at ensuring that agreements with organisations representing small
numbers of workers do not remove protections from the whole workforce. It should not be used to
undermine genuine collective agreements.
5. Can the 60-hour weekly working hour limit be exceeded in seasonal work?
No. Seasonal work is not considered to be an exceptional circumstance, as defined under clause
6.5 of the ETI Base Code. The reason for this is that the work, while being irregular, is entirely
predictable and anticipated.
6. Can a worker work more than 60 hours per week by averaging the hours worked over a
period of time?
Unlike the contracted 48-hours provision, there is no possibility of averaging hours around the
60-hour limit. The Base Code is very clear, a worker cannot exceed 60 hours in any one week,
unless there are exceptional circumstances, it is allowed by national law, covered by a collective
agreement and appropriate safety safeguards are in place. This is an absolute weekly, hourly limit.
7. How can the company ensure that overtime is voluntary?
When an employer requires workers to work overtime, the employer should clearly communicate
to workers that they are free to refuse and that there will be no negative repercussions if they do.
To avoid coercion, the employer should ensure that:
if transportation is provided, it is available at the end of the normal work day or shift
so that workers who choose not to perform overtime can leave the facility;

the facility doors or gates are unlocked to allow workers to leave freely at the end
of their work day;

if daily production targets are used, they are achievable within the standard
working hours so employees do not feel pressured to work overtime in order to
meet them;

overtime requests are not always directed at the same workers;

the companys internal policies clearly state that workers are free to refuse
overtime;

workers are given sufficient notice of overtime work so alternative arrangements

can be made if workers are not able to perform the work; and

workers agreement to perform overtime work is documented.

8. What does averaging mean in the context of UK law?

The UK Working Time Regulations allow the legal maximum working hours limit of 48 hours per
week to be exceeded in any one week as long as the average number of hours over 17 weeks (the
reference period) does not exceed 48 hours per week.
9. If workers have signed a 48-hour week opt-out agreement in the UK, can any overtime
they do be considered voluntary?
Workers over the age of 18 can choose to opt out of the 48-hour limit for a certain period or
indefinitely. This agreement must be made voluntarily and in writing by the employee; it can also
be cancelled by the employee by providing the employer at least seven days notice. However,
signing the opt-out clause does not prevent workers from refusing to work for more than 48 hours
per week. Any hours worked above the 48-hour per week fixed or, where appropriate, average
legal working hours must be voluntary. In addition, the ETI Base Code takes precedent over the
opt-out agreement and workers should not work more than 60-hours in any week unless
exceptional circumstances apply, it is provided for by national law, safety provisions are in place
and it is covered by a collective agreement. Further, a premium must be paid in relation to any
overtime.
10. When are part-time workers or workers with flexible hours contracts entitled to overtime
premium payments?
Determining when part-time workers or workers with flexible hours are entitled to premium
payments requires reference to their contracts, collective agreements and national law, which will
state when overtime payment starts. In some countries or situations part-time workers only get
overtime premiums once they have worked more than the normal full-time hours for comparable
workers. The important thing is to assess national law, the workers contract, and any collective
agreement, to identify the point at which overtime is deemed to start.
If the law and contract allows for workers to not be paid overtime premiums until after the
equivalent of full-time hours, this should be clearly stated in information provided to workers on the
commencement of employment.
11. How does the weekly rest day requirement apply in the context of the comprehensive
working hours system (CWHS) in China?
The ETI Base Code is clear that workers must be provided with a full day off in every seven-day
period or, where this is permitted under national law, two days off in 14. This rest period is in
addition to any annual leave or public holidays that are provided under national legislation and
practice.
Chinese law does not expressly address the issue whether two days off in every 14 is allowed, but
this must be a minimum basis for weekly rest.

12. Are workers allowed to work more than seven days without a rest day?
This depends on the law. The ETI Base Code states that, if the law allows, workers may not have
a rest day in each seven day period, but they must have two full days off in every 14-day period.
13. Are there limits on daily working?
The ETI Base Code does not provide specific regulation on the number of hours per day that can
be worked. Nevertheless employers should seek to avoid long working days as these may put a
workers health at risk. There is a duty in the Base Code and national law to provide a safe system
of work, which must prevent excessively long work shifts or continuous working. This is because of
the health and safety risks that arise from excessive working time. In many countries national law
will contain provisions related to either maximum daily working hours, minimum daily rest hours
and rest days. It should be remembered that ILO Convention No 1 (1921) called for the adoption of
an 8-hour maximum day.
14. Who is responsible for paying overtime premiums to agency workers in the UK?
As a general rule, the party responsible for paying workers is the party with whom the employment
contract is made. Therefore, if workers are employed by an agency which contracts their services
to a company, the agency would be responsible for paying overtime premiums to workers.
However, companies using agency workers should verify that the workers are receiving
appropriate overtime premiums and that working hours are being adequately managed.
Companies are responsible for ensuring that the ETI Base Code is respected in relation to all
workers involved in the production of goods or services covered by the Base Code, whether they
are direct or indirect employees (agency workers). This should involve assessing whether the fees
they pay to the agency are sufficient to allow for overtime premium payments.
15. If overtime is systematically requested of the same workers, is this a problem?
Potentially, yes. For example, in certain facilities, employers may offer overtime exclusively to
migrant workers as there is a perception that they need less leisure time than local workers
(because they are far from their relatives, they want to save money to send back home, and so
on). However, local workers may perceive this as discriminatory because it prevents them from
working overtime and earning more money. Therefore, employers should ensure that all
employees are offered the opportunity to work overtime. Similarly, overtime should not be
preferentially offered to those workers who have previously been willing to work overtime as this
may give rise to an interpretation that there is a compulsion to work overtime in order to get a
future opportunity to work overtime.
16. The revised wording of clause 6.2 has a footnote reference to the ILOs 40 hours per
week recommendation: would an ETI member be expected to ensure that their suppliers
were actively reducing working hours to 40 per week?
ETI members are not expected to ensure that their suppliers are actively reducing the working
week, although they might wish to encourage suppliers to do so, and give preference to suppliers
who have, for example, negotiated a shorter working week with their workforce. ETI members
generally set required working hours below 48 hours; for any which do not, the recommendation
would also apply to employees in their own operations. The international standards (ILO
Conventions) which underpin the Base Code establish 48 hours as the maximum length of the
normal working week, but also recognise the importance, in terms of workers health and wellbeing, of moving to a shorter working week, overtime and as appropriate and achievable in the

national context. This may be some way off in many countries, and bringing working hours down to
the 48-hour standard will continue to be the priority for many ETI members.
17. Will ethical audits be expected to cover this footnote?
No. This footnote is a recommendation rather than a requirement and inability to meet this
standard will not be seen as non-compliance under the ETI Base Code. However, the length of
the normal working week should be recorded as part of any audit, and it would be expected that
employers explore options for continuous improvement that work towards achieving this.
Employers are encouraged to discuss opportunities for reducing the working week with their
employees as part of normal negotiations over conditions, and with the ETI member companies
they supply.

Wages and purchasing theories

Source: http://www.britannica.com/EBchecked/topic/633855/wage-and-salary (Jan 2014)
Income derived from human labour. Technically, wages and salaries cover all compensation
made toemployees for either physical or mental work, but they do not represent the income of
the self-employed. Labour costs are not identical to wage and salary costs, because total labour
costs may include such items as cafeterias or meeting rooms maintained for the convenience of
employees. Wages and salaries usually include remuneration such as paid vacations, holidays,
and sick leave, as well as fringe benefits and supplements in the form of pensions or health
insurance sponsored by the employer. Additional compensation can be paid in the form of bonuses
or stock, many of which are linked to individual or group performance.

Wage theory
Theories of wage determination and speculations on what share the labour force contributes to the
gross domestic product have varied from time to time, changing as the economic environment
itself has changed. Contemporary wage theory could not have developed until the feudal
system had been replaced by the modern economy with its modern institutions (such as
corporations).

Classical theories
The Scottish economist and philosopher Adam Smith, in The Wealth of Nations (1776), failed
to propose a definitive theory of wages, but he anticipated several theories that were developed by
others. Smith thought that wages were determined in the marketplace through the law of supply
and demand. Workers and employers would naturally follow their own self-interest; labour would

be attracted to the jobs where labour was needed most, and the resulting employment conditions
would ultimately benefit the whole of society.
Although Smith discussed many elements central to employment, he gave no precise analysis of
the supply of and demand for labour, nor did he weave them into a consistent theoretical pattern.
He did, however, prefigure important developments in modern theory by arguing that the quality of
worker skill was the central determinant of economic progress. Moreover, he noted that workers
would need to be compensated by increased wages if they were to bear the cost of acquiring new
skillsan assumption that still applies in contemporary human-capital theory. Smith also believed
that in the case of an advancing nation, the wage level would have to be higher than the
subsistence level in order to spur population growth, because more people would be needed to fill
the extra jobs created by the expanding economy.

Subsistence theory
Subsistence theories emphasize the supply aspects of the labour market while neglecting the
demand aspects. They hold that change in the supply of workers is the basic force that drives real
wages to the minimum required for subsistence (that is, for basic needs such as food and shelter).
Elements of a subsistence theory appear in The Wealth of Nations , where Smith wrote that the
wages paid to workers had to be enough to allow them to live and to support their families. The
English classical economists who succeeded Smith, such as David Ricardo and Thomas
Malthus, held a more pessimistic outlook. Ricardo wrote that the natural price of labour was
simply the price necessary to enable the labourers to subsist and to perpetuate the race. Ricardos
statement was consistent with the Malthusian theory of population , which held that population
adjusts to the means of supporting it.
Subsistence theorists argued that the market price of labour would not vary from the natural price
for long: if wages rose above subsistence, the number of workers would increase and bring the
wage rates down; if wages fell below subsistence, the number of workers would decrease and
push the wage rates up. At the time that these economists wrote, most workers were actually living
near the subsistence level, and population appeared to be trying to outrun the means of
subsistence. Thus, the subsistence theory seemed to fit the facts. Although Ricardo said that the
natural price of labour was not fixed (it could change if population levels moderated in relation to
the food supply and other items necessary to maintain labour), later writers were more pessimistic
about the prospects for wage earners. Their inflexible conclusion that wages would always be
driven down earned the subsistence theory the name iron law of wages.

Wages-fund theory
Smith said that the demand for labour could not increase except in proportion to the increase of
the funds destined for the payment of wages. Ricardo maintained that an increase in capital would
result in an increase in the demand for labour. Statements such as these foreshadowed
the wages-fund theory , which held that a predetermined fund of wealth existed for the

payment of wages. Smith defined this theoretical fund as the surplus or disposable income that
could be used by the wealthy to employ others. Ricardo thought of it in terms of the capitalsuch
as food, clothing, tools, raw materials, or machineryneeded for conditions of employment. The
size of the fund could fluctuate over periods of time, but at any given moment the amount was
fixed, and the average wage could be determined simply by dividing the value of this fund by the
number of workers.
Regardless of the makeup of the fund, the obvious conclusion was that when the fund was large in
relation to the number of workers, wages would be high. When it was relatively small, wages
would be low. If population increased too rapidly in relation to food and other necessities (as
outlined by Malthus), wages would be driven to the subsistence level. Therefore, went the
speculation, labourers would be at an advantage if they contributed to the accumulation of capital
to enlarge the fund; if they made exorbitant demands on employers or formed labour organizations
that diminished capital, they would be reducing the size of the fund, thereby forcing wages down. It
followed that legislation designed to raise wages would not be successful, for, with only a fixed
fund to draw upon, higher wages for some workers could be won only at the expense of other
workers.
This theory was generally accepted for 50 years by economists such as Nassau William
Senior and John Stuart Mill . After 1865 the wages-fund theory was discredited by W.T. Thornton,
F.D. Longe, and Francis A. Walker, all of whom argued that the demand for labour was not
determined by a fund but by the consumer demand for products. Furthermore, the proponents of
the wages-fund doctrine had been unable to prove the existence of any kind of fund that
maintained a predetermined relationship with capital, and they also failed to identify what portion
of the labour forces contribution to a product was actually paid out in wages. Indeed, the total
amount paid in wages depended upon a number of factors, including the bargaining power of
labourers. Despite these telling criticisms, however, the wages-fund theory remained influential
until the end of the 19th century.

Marxian surplus-value theory

Karl Marx accepted Ricardos labour theory of value (that the value of a product is based on the
quantity of labour that went into producing it), but he subscribed to a subsistence theory of
wages for a different reason than that given by the classical economists. In Marxs estimation, it
was not the pressure of population that drove wages to the subsistence level but rather the
existence of large numbers of unemployed workers. Marx blamed unemployment on capitalists.
He renewed Ricardos belief that the exchange value of any product was determined by the hours
of labour necessary to create it. Furthermore, Marx held that, in capitalism, labour was merely a
commodity: in exchange for work, a labourer would receive a subsistence wage. Marx speculated,
however, that the owner of capital could force the worker to spend more time on the job than was
necessary for earning this subsistence income, and the excess productor surplus valuethus
created would be claimed by the owner. This argument was eventually disproved, and the labour

theory of value and the subsistence theory of wages were also found to be invalid. Without them,
the surplus-value theory collapsed.

Residual-claimant theory
The residual-claimant theory holds that, after all other factors of production have received
compensation for their contribution to the process, the amount of capital left over will go to the
remaining factor. Smith implied such a theory for wages, since he said that rent would be deducted
first and profits next. In 1875 Walker worked out a residual theory of wages in which the shares of
the landlord, capital owner, and entrepreneur were determined independently and subtracted, thus
leaving the remainder for labour in the form of wages. It should be noted, however, that any of the
factors of production may be selected as the residual claimantassuming that independent
determinations may be made for the shares of the other factors. It is doubtful, therefore, that such
a theory has much value as an explanation of wage phenomena.

Bargaining theory
The bargaining theory of wages holds that wages, hours, and working conditions are
determined by the relative bargaining strength of the parties to the agreement. Smith hinted at
such a theory when he noted that employers had greater bargaining strength than employees.
Employers were in a better position to unify their opposition to employee demands, and employers
were also able to withstand the loss of income for a longer period than could the employees. This
idea was developed to a considerable extent by John Davidson, who proposed in The Bargain
Theory of Wages (1898) that the determination of wages is an extremely complicated process
involving numerous influences that interact to establish the relative bargaining strength of the
parties.
This theory argues that no one factor or single combination of factors determines wages and that
no one rate of pay necessarily prevails. Instead, there is a range of rates, any of which may exist
simultaneously. The upper limit of the range represents the rate beyond which the employer
refuses to hire certain workers. This rate can be influenced by many factors, including the
productivity of the workers, the competitive situation, the size of the investment, and the
employers estimate of future business conditions. The lower limit of the range defines the rate
below which the workers will not offer their services to the employer. Influences on this rate
include minimum wage legislation, the workers standard of living, their appraisal of the
employment situation, and their knowledge of rates paid to others. Neither the upper nor the lower
limit is fixed, and either may move upward or downward. The rate or rates within the range are
determined by relative bargaining power.
The bargaining theory is very attractive to labour organizations, for, contrary to the subsistence
and wages-fund theories, it provides a very cogent reason for the existence of unions: simply put,
the bargaining strength of a union is much greater than that of individuals. It should be observed,
however, that historically labourers were capable of improving their situations without the help of

labour organizations. This indicates that factors other than the relative bargaining strength of the
parties must have been at work. Although the bargaining theory can explain wage rates in shortrun situations (such as the existence of certain wage differentials), over the long run it has failed to
explain the changes that are observed in the average levels of wages.

Marginal-productivity theory and its critics

Toward the end of the 19th century, marginal-productivity analysis was applied not only to
labour but to other factors of production as well. It was not a new idea as an explanation of wage
phenomena, for Smith had observed that a relationship existed between wage rates and the
productivity of labour, and the German economist Johann Heinrich von Thnen had worked out
a marginal-productivity type of analysis for wages in 1826. Economists in the Austrian
school made important contributions to the marginal idea after 1870, and, building on these
grounds, a number of economists in the 1890sincluding Philip Henry Wicksteed in England
and John Bates Clark in the United Statesdeveloped the idea into the marginal-productivity
theory of distribution. It is likely that the disturbing conclusions drawn by Marx from classical
economic theory inspired this development. In the early 1930s refinements to the marginalproductivity analysis, particularly in the area of monopolistic competition, were made by Joan
Robinson in England and Edward H. Chamberlin in the United States.
As applied to wages, the marginal-productivity theory holds that employers will tend to hire
workers of a particular type until the contribution that the last (marginal) worker makes to the total
value of the product is equal to the extra cost incurred by the hiring of one more worker. The wage
rate is established in the market through the demand for, and supply of, the type of labour needed
for the job. Competitive market forces assure the workers that they will receive a wage equal to
the marginal product. Under the law of diminishing marginal productivity , the contribution of
each additional worker is less than that of his predecessor, but workers of a particular type are
assumed to be alikein other words, all employees are deemed interchangeableand any one
could be considered the marginal worker. Because of this, all workers receive the same wage,
and, therefore, by hiring to the margin, the employer maximizes his profits. As long as each
additional worker contributes more to total value than he costs in wages, it pays the employer to
continue hiring. Beyond the margin, additional workers would cost more than their contribution and
would subtract from attainable profits.
Although the marginal-productivity theory was once the prevailing theory of wages, it has since
been attacked by many and discarded by some. The chief criticism of the theory is that it rests on
unrealistic assumptions, such as the existence of homogeneous groups of workers whose
knowledge of the labour market is so complete that they will always move to the best job
opportunities. Workers are not, in fact, homogeneous, nor are they interchangeable. Usually they
have little knowledge of the labour market, and, because of domestic ties, seniority, and other
considerations, they do not often move quickly from one job to another. The assumption that
employers are able to measure productivity accurately and compete freely in the labour market is
also far-fetched. Even the assumption that all employers attempt to maximize profits may be

doubted. The profit motive does not affect charitable institutions or government agencies. And
finally, for the theory to operate properly, these ideal conditions must be met: labour and capital
must be fully employed so that increased productivity can be secured only at increased cost;
capital and labour must be easily substitutable for each other; and the situation must be
completely competitive. Obviously, none of these assumptions fits the real world.
Monopolistic or near-monopolistic conditions, for example, are common in modern economies,
particularly where there are only a few large producers (such as in the automotive industry ). In
many cases wages are determined at the bargaining table, where producers negotiate with
representatives of organized. Under such circumstances, the marginal-productivity analysis cannot
determine wages precisely; it can show only the positions that the union (as a monopolist of labour
supply) and the employer (as a monopolistic, or single, purchaser of labour services) will strive to
reach, depending upon their current policies.
Some critics feel that the unrealistic nature of its assumptions makes marginal-productivity theory
completely untenable. At best, the theory seems useful only as a contribution to understanding
long-term trends in wages.

Purchasing-power theory
The purchasing-power theory of wages concerns the relation between wages and employment and
the business cycle. It is not a theory of wage determination but rather a theory of the influence
spending has (through consumption and investment) on economic activity. The theory gained
prominence during the Great Depression of the 1930s, when it became apparent that lowering
wages might not increase employment as previously had been assumed. In General Theory of
Employment, Interest, and Money(1936), English economist John Maynard Keynes argued
that (1) depressional unemployment could not be explained by frictions in the labour market that
interrupted the economys movement toward full-employment equilibrium and (2) the assumption
that all other things remained equal presented a special case that had no real application to the
existing situation. Keynes related changes in employment to changes
in consumption and investment, and he pointed out that economic equilibrium could exist with
less than full employment.
The theory is based on the assumption that changes in wages will have a significant effect on
consumption because wages make up such a large percentage of the national income. It is
therefore assumed that a decline in wages will reduce consumption and that this in turn will reduce
demand for goods and services, causing the demand for labour to fall.
The actual outcomes would depend upon several considerations, particularly those that involve
prices (or other cost-of-living considerations). If wages fall more rapidly than prices, labours real
wages will be drastically reduced, consumption will fall, and unemployment will riseunless total
spending is maintained by increased investment, usually in the form of government spending.
Then again, entrepreneurs may look upon the lower wage costs (as they relate to prices) as an

encouraging sign toward greater profits, in which case they may increase their investments and
employ more people at the lower rates, thus maintaining or even increasing total spending and
employment. If employers look upon the falling wages and prices as an indication of further
declines, however, they may contract their investments or do no more than maintain them. In this
case, total spending and employment will decline.
Conversely, if wages fall less rapidly than prices, labours real wages will increase, and
consumption may rise. If investment is at least maintained, total spending in terms of constant
dollars will increase, thus improving employment. If entrepreneurs look upon the shrinking profit
margin as a danger signal, however, they may reduce their investments, and, if the result is a
reduction in total spending, employment will fall. If wages and prices fall the same amount, there
should be no change in consumption and investment, and, in that case, employment will remain
unchanged.
It should be noted that the purchasing-power theory involves psychological and other subjective
considerations as well as those that may be measured more objectively. Whether it can be used
effectively to predict or control the business cycle depends upon political as well as economic
factors, because government expenditures are a part of total spending, taxes may affect private
spending, etc. The applicability of the theory is to the whole economy rather than to the individual
firm.

Human-capital theory
A particular application of marginalist analysis (a refinement of marginal-productivity theory)
became known as human-capital theory. It has since become a dominant means of understanding
how wages are determined. It holds that earnings in the labour market depend upon the
employees information and skills. The idea that workers embody information and skills that
contribute to the production process goes back at least to Adam Smith. It builds on the recognition
that families make a major contribution to the acquisition of skills. Quantitative research during the
1950s and 60s revealed that aggregate growth in output had outpaced aggregate growth in the
standard inputs of land, labour, and capital. Economists who explored this phenomenon suggested
that growth in aggregate knowledge and skills in the workforce, especially those conveyed in
formal education, might account for this discrepancy. In the early 1960s the American
economist Theodore W. Schultz coined the term human capital to refer to this stock of
productive knowledge and skills possessed by workers.
The theory of human capital was shaped largely by Gary S. Becker, an American student of
Schultz who treated human capital as the outcome of an investment process. Because the
acquisition of productive knowledge is costly (e.g., students pay direct costs and forego
opportunities to earn wages), Becker concluded that rational actors will make such investments
only if the expected stream of future benefits exceeds the short-term costs associated with
acquiring the skills. Such investments therefore affect ones age-earnings profile, the trajectory of
earnings over ones lifetime. Those who leave school early, for example, earn market wages for

more years on average than those who take advantage of extended schooling, but those in the
latter group typically earn higher wages over their lifetimes. Under certain conditions, however, the
total lifetime earnings of the two groups can be the same, even though the highly educated tend to
earn higher wages when they work.
Investments in human capital depend upon the costs of acquiring the skills and the returns that are
expected from the investment. Families can influence these variables. Wealthier families, for
example, can lower the costs of human-capital acquisition for their children by subsidizing
their education and training costs. In addition, wealthier and better-educated parents can shape
the tastes and preferences of their children by instilling in them a high regard for education and a
desire to perform well in school. This translates into a higher rate of return on knowledge and skills
relative to that of children from less-advantaged families. Thus, parents and guardians play an
essential role in creating advantages for their children by encouraging them to acquire substantial
stocks of human capital. Ultimately, it is human capital which has value in labour markets.
Becker introduced the important distinction between general human capital (which is valued by
all potential employers) and firm-specific human capital (which involves skills and knowledge that
have productive value in only one particular company). Formal education produces general human
capital, while on-the-job training usually produces both types. To understand investments in human
capital by employees and employers, one must pay attention to the different incentives involved. In
all cases, employers are loathe to provide general skills, because employees can use them in
other firms. Conversely, employees are less inclined to invest in firm-specific human capital
without substantial job security or reimbursement. These issues lie at the heart of many
contemporary analyses of employment relations.

Living wage initiatives

Living Wage is a key issue for the selection of campaigning organisations
and labour rights specialists listed here.

ACT - initiative on living wages ACT (Action, Collaboration,

Transformation) is an initiative between international brands & retailers,

manufacturers, and trade unions to address the issue of living wages in the textile
and garment supply chain. While ACT is not an ETI-run programme, many of the
brands participating are ETI members and we are closely engaged
with the initiative as part of our wider work on living wages.
ActionAid As part of its work on Corporate Accountability, ActionAid has

developed a costing model for clothing brands and retailers. This briefing
presents a model for use by garment buying companies to cost a living wage into
the overall amount they pay to suppliers. The model also aims to improve
compliance with wage defaulting issues that are endemic in the garment industry,
such as payment below the legal minimum wage, and under-payment of overtime.
Asia Floor Wage Union leaders and labour activists in Asia came together to

explore a union-based Asian strategy for the global garment industry. The
discussions began in India and moved to other Asian countries. Wage emerged as
the key issue for strategising; and the concept of an Asia Floor Wage began to be
explored. The scope of the discussion was then expanded by organizing meetings
in different places in North America, United States and Europe with the help of
several partners. This process took place between 2005 and 2007. In 2007, the
First International Planning Meeting was held in South Asia. Discussions took place
on how to move forward, given that we had achieved consensus on the concept
itself. The international participants came to an agreement on the goals, overall
direction, content, structure, and timeline for an Asia Floor Wage campaign. What
began as an Asia-based process has now expanded to become an international
alliance for Asia Floor Wage.
Church Action on Poverty Living wage is part of Church Action on Poverty's

three-year campaign to Close the Gap. It is calling for four key changes including
fair pay (the others are fair taxes, fair prices and a fair say). As well as trying to shift
the public mood so that excessive pay gaps are unacceptable, the campaign is
encouraging employers to commit to paying a Living Wage.
Clean Clothes Campaign The Clean Clothes Campaign is an alliance of
organisations in 15 European countries. Members include trade unions and NGOs
covering a broad spectrum of perspectives and interests, such as womens rights,
consumer advocacy and poverty reduction. They rely on a partner network of more
than 200 organisations and unions in garment-producing countries to identify local
problems and objectives, and to help develop campaign strategies to support
workers in achieving their goals. They cooperate extensively with similar labour
rights campaigns in the United States, Canada, and Australia. They are currently
conducting a Wage Survey to gather a snapshot of fashion company and retailer
progress towards the payment of a living wage. The report will be published midFebruary 2014 Ergon Associates www.ergononline.net have done a lot of
research on LW and contributed to at least two of the studies mentioned below.
Ergon were instrumental in developing the concept of wage ladders a visual way

of representing different levels of wages defined by governments and international

organisations such as poverty lines, extreme poverty lines, minimum wage level,
average national wage level etc.
European Conference on Living Wages On 25-26 November 2013, The Ministry

of Foreign Affairs in the Netherlands (MinBuZa), the German Federal Ministry for
Economic Cooperation and Development (BMZ) and the German Round Table
Codes hosted the European Conference on Living Wages. Conference participants
were from companies, trade unions, NGOs, multi-stakeholder initiatives and
European government. They gave their support to a Declaration of Intent and
an Action Plan on Living Wages. The conference report and speakers
presentations are also available on the website. Further meetings and initiatives
are planned.
Ethical Tea Partnership ETP is a non-commercial alliance of international tea

companies who share a vision of a thriving tea industry that is socially just and
environmentally sustainable. It was formed in 1997 when a number of major tea
companies took the decision to work together to improve the social and
environmental conditions in their supply chains. Its members range from large
international brands to smaller independently-owned labels. Together they account
for more than 50 brands, which sell in over 100 countries. (see below for ETP and
Oxfams report on wages in the tea sector)
Fairfood International is an Amsterdam-based international non-profit

organisation advocating for a sustainable and fair global food system. Their
mission is to improve the socio-economic conditions of vulnerable people in the
global food system and the sustainable use of natural resources. They work to
influence food companies and governments to solve issues affecting farmers,
workers, consumers and the environment within food supply chains. A Working
Group on Insufficient Income and Income Insecurity is currently working on an
organisation-wide approach towards the topic of living wages for workers in the
agricultural industry.
Fairtrade International is the organisation that coordinates Fairtrade

labelling at an international level. From They set international Fairtrade

standards, organise support for producers around the world, develop global
Fairtrade strategy, and promote trade justice internationally. Recently they
released a new standard for hired labour that addresses the issue of living
wages. They are also part of the SAI and ISEAL initiatives to establish a common
methodology for calculating living wages for certification bodies.
Fair Labor Association FLA is a collaborative effort of companies, colleges and
universities, and civil society organizations. It seeks to create lasting solutions to
abusive labor practices by offering tools and resources to companies, delivering
training to factory workers and management, conducting due diligence through
independent assessments, and advocating for greater accountability and
transparency from companies, manufacturers, factories and others involved in
global supply chains.

Fair Wage Network The Fair Wage Network has been created on the initiative of

Daniel Vaughan-Whitehead and Auret van Heerden. The decision to set up the Fair
Wage Network was taken on the occasion of the first Fair Wage conference,
organized by the FLA (see above) in Washington on October 26, 2009. The aim of
the network is to regroup all the actors involved along the supply chain and present
in the CSR arena who would be ready to commit themselves to work to promote
better wage practices. The idea is to set up an interactive and dynamic process,
involving NGOs, managers, workers representatives and researchers.
Fair Wear Foundation Fair Wear Foundation (FWF) is a Dutch-based

independent, non-profit organisation that works with companies and factories to

improve labour conditions for garment workers. FWFs 80 member companies
represent over 120 brands, and are based in seven European countries; member
products are sold in over 20,000 retail outlets in more than 80 countries around the
world. FWF is active in 15 production countries in Asia, Europe and Africa.
Labour Behind the Label Labour Behind the Label is a campaign that works to

improve conditions and empower workers in the global garment industry. It

coordinates the UK platform of the Clean Clothes Campaign. LBL publishes an
annual report asking the UK's top high street retailers what they are doing to
ensure the workers who make their clothes are paid a living wage and grading the
companies accordingly (see below for latest report).
Living Wage Campaign In 2001 London Citizens, an independent community

alliance, launched the Living Wage campaign. The Living Wage Foundation
encourages employers in the UK to pay the Living Wage an hourly rate set
independently and updated annually by the Centre for Research in Social Policy at
Loughborough University, calculated according to the basic cost of living in the UK
on a voluntary basis. The Living Wage enjoys cross party support in the UK, with
public backing from the Prime Minister and the Leader of the Opposition. The
Mayor of London's office hosts a Living Wage Unit which monitors the (higher) level
needed for a living wage in London. The London Living Wage is currently
calculated as 8.55 per hour. The UK Living Wage for outside of London is
currently 7.45 per hour.
Social Accountability International (SAI) is a non-governmental, multistakeholder organisation whose mission is to advance the human rights of
workers around the world. The concept of a living wage is central to the SA8000
standard and it is currently engaged in work to mainstream a groundbreaking
methodology to advance the payment of the living wage. This work seeks to
address three key issues hampering progress on living wages; the lack of a
globally accepted definition, the lack of transparent data on calculations of living
wages accessible by stakeholders willing to work toward implementation of a
living wage and lack of sufficient insights in the differences and complementarity
between living wages and national minimum wages and collective bargained
wages. The work is being undertaken in partnership with Dr. Richard Anker,
former Senior Economist at the ILO, and Fairtrade International, Forest

Stewardship Council (FSC), GoodWeave, Sustainable Agriculture

Network/Rainforest Alliance (SAN/RA), Social Accountability International (SAI)
and UTZ Certified. The goal is to work on the methodology, promotion and
implementation of a living wage for the workers that are protected by our
respective labour standards. The long term goal and shared mission of our six
organizations is to see improvements in workers' conditions, including wage
levels, in the farms, factories and supply chains participating in our respective
certification systems and beyond.
TUC Britain needs a pay rise CampaignThe campaign focuses on four factors:

a properly enforced minimum wage, higher minimum wages for employers who can
afford to pay more, increased commitment to the living wage, and a crackdown on
excessive executive pay.
Worker Rights Consortium (WRC) is an independent labour rights

monitoring organisation, conducting investigations of working conditions in

factories around the globe. Their purpose is to combat sweatshops and protect the
rights of workers who make apparel and other products. The WRC conducts
independent, in-depth investigations; issues public reports on factories producing
for major brands; and aids workers at these factories in their efforts to end labour
abuses and defend their workplace rights. WRC has established a living wage
calculation method and conducting research into wages of garment workers
supplying USA.
World Banana Forum The World Banana Forum is a permanent space of
assembly for participants representing the global banana supply-chain to promote
open dialogue on challenges facing the banana industry. The initiative brings
together producers, their organizations, trade unions, cooperatives, exporter
groups, fresh produce companies, retailers, traders, public agencies, governments,
research institutions and civil society organizations. The Mission of the World
Banana Forum is to inspire collaboration between stakeholders that produces
pragmatic outcomes for the betterment of the banana industry; and, to achieve
an industry-wide consensus of best practices regarding workplace issues, gender
equity, environmental impact, sustainable production and economic issues. (see
below for WBFs living wage methodology baseline)