Michael Ellis
June 25, 2022

A Conceptualization of Sub-Living Wages: Liabilities, Leverage, and Risk

A recent paper written by in part Inherent Group Advisory Council Member George Serafeim presents some new ideas about living wages.

Currently the accounting system records employee wages as an expense in the income statement. However, paying below living wages can expose an organization to reputational and operational risks. In this paper, we offer an alternative conceptualization of the issue of low wages and in particular wages that are below the local living wage. We propose a simple double entry bookkeeping approach to account for wages paid below a local living wage level through a firm’s balance sheet, where wages below the living wage threshold create a leverage effect as the organization borrows from society. Firms paying below the living wage therefore exhibit higher leverage reflecting higher stakeholder risk. Investors, policymakers, customers, corporate managers, and other stakeholders can use this alternative conceptualization to assess an organization’s exposure to human capital erosion.

Keller, Drew and Panella, Katie and Serafeim, George, A Conceptualization of Sub-Living Wages: Liabilities, Leverage, and Risk (June 3, 2022). Harvard Business School Accounting & Management Unit Working Paper No. 22-076, Available at SSRN: https://ssrn.com/abstract=4137565 or http://dx.doi.org/10.2139/ssrn.4137565