Paying Living Wages in Supply Chains: The Effects of Uncertainties, Coordination, and Competition

Abstract

The living wage (LW) movement is part of the fight against forced labor: It aims to ensure that workers receive an income that can cover their daily subsistence needs. Our study expands the current understanding of LW pay by shifting from the traditional labor-capital view to an operations and supply chain management perspective. We use a game theoretical approach to explore the different responses of two competing supply chains to LW accreditation. We find that a moderate LW standard allows for Pareto optimality where key stakeholders (i.e., manufacturers, retailers, consumers, and workers) have a collective interest in promoting the LW movement. From a multistakeholder lens, the LW movement is only sustainable if the LW standard is neither too aggressive nor too conservative. We further demonstrate the following points. (1) Not all types of uncertainties are harmful to supply chains with LW pay. Yield uncertainty slows down the progress of the LW movement, whereas demand uncertainty encourages the voluntary adoption of LW pay among all stakeholders. (2) Supply chain coordination may slow the adoption of voluntary LW pay, which implies that the classic coordination paradigm is not a panacea in alleviating the plight of underpaid workers. (3) From the perspective of competition intensity, greater monopsony power hinders the progress of the LW movement, and we provide evidence for the positive effects of a competitive environment on incentivizing voluntary LW pay.