Market Perspectives: Topical Articles

Living wages in the garment supply chain

Living wages in the garment supply chain

The living wage concept is established in several International Labor Organization (ILO) declarations and is acknowledged in the United Nations (UN) Universal Declaration of Human Rights and in the UN International Covenant on Economic, Social and Cultural Rights.

Goal: Address wage concerns to mitigate supply chain labor standards risks
Engagement since: 2015
Sectors involved: Textiles, Apparel & Luxury Goods

Key summary

  • Most apparel companies have been able to review and improve labor standards in their supply chains in recent years, yet workers’ wages in many markets persistently remain below the cost of living.
  • Despite some targeted corporate initiatives to address the question of living wages among supply chain workers, there is no evidence of any significant progress to date.
  • Only two out of 40 companies we engaged have committed to a time-bound strategy to improve supply chain wages.

Background

Supply chain workers in many low-cost garment-producing countries remain trapped in poverty with income levels too low to afford basic necessities, such as sufficient food and adequate housing. This is leading to serious concerns about the welfare of more than 60 million people— and their direct dependents—employed in the textile, clothing and footwear sectors globally.

For more than a decade, we have been engaging with apparel companies on a range of supply chain labor issues, including health and safety practices, child labor policies and concerns over migrant labor standards. While we noted many improvements during this period, the Rana Plaza building collapse in Bangladesh in 2013 was a stark reminder of the persistent shortcomings and risks in many countries that supply the global apparel industry. There have been some important breakthroughs, including the introduction of a minimum wage and enhanced monitoring of social and safety standards. However, underlying structural issues—such as poor levels of governance and weak institutions—which could lead to similar catastrophes repeating, remain largely in place.

The issue of supply chain wages is intricately linked to such broader market failings that have eroded labor standards in many low-cost garment-producing countries.

Sourcing efficiency vs. risk

Clothing retailers operate in a fragmented and highly competitive market. Improving supply chain efficiency, gained through order volume and sourcing location, is crucial for retailers to achieve savings. In the past, many companies have constantly shifted their sourcing into low-cost, low-wage inflation countries like Bangladesh, Cambodia and more recently Myanmar.

The benefits of low costs in many of these producing countries need to be balanced against the disadvantage of longer lead times in shipping orders back to Europe and North America. In addition, the increased risk associated with these countries, including business continuity issues and political risk, can result in even higher lead times for bringing products to market. This is crucial for many retailers where the success of the business model is reliant on being able to offer the latest fashion trends quickly and at an affordable price. As such, the Western apparel companies should have an incentive to develop innovative business models that seek to establish more sustainable sourcing markets where supply chain efficiency and risk factors are balanced.

However, the lack of progress in tackling labor standards continues to represent real business risks for suppliers from low-income countries and Western buying companies alike. In the context of in-work poverty, low wages can be linked at a factory level to high turnover of labor, restricted skills development as well as strikes and social unrest1. As a result, suppliers are more likely to experience operational disruptions and reduced productivity2. In addition to reputational risks, these factors can negatively affect the security of supply for global brands and retailers.

Engagement action

In 2015, we started an engagement project on this issue. We reached out to more than 40 textile and apparel companies to discuss their approach for addressing wage concerns in their global supply chain. We asked for details on companies’ risk exposure and mitigation measures as well as on specific activities focused on living wage questions. We also probed how companies monitor suppliers’ general payment practices and how they assess procurement strategies in terms of their potential impact on wage levels.

To get a better understanding of leading practices in the garment industry, we initially spoke with five companies well-known to be working on the issue of supply chain wage levels. These were Adidas, Hennes & Mauritz (H&M), Inditex, Marks & Spencer Group, and Associated British Foods (parent company of UK fashion retailer Primark). Following these discussions, we developed a more detailed list of questions and reached out to a further 35 companies to review their approaches. All companies were assessed on three key factors that can positively influence wage-setting processes: sustainable purchasing practices, supporting workers’ rights and collaborative action.

Findings of engagement

Following our engagement with 40 companies, we divided them into three groups with distinct standard of practice around living wage:

Leaders: 16 provided evidence of initiatives focused on wage levels in the supply chain. All five of the companies we spoke to at the start of this project Adidas, H&M, Inditex, Marks & Spencer Group and Primark were in this group.

Middle-of-the-pack: 14 companies had considerable supplier management and audit programs in place but did not carry out any specific actions to increase wages above the legal minimum wage. Although some executives expressed awareness of the risk of inadequate supply chain wages, their corporate response revolved primarily around monitoring actions linked to payroll systems, such as double bookkeeping, withholding social benefits payments and faulty overtime records.

Laggards: 10 companies either did not review the risk of low supply chain wages or declined to discuss with us this topic altogether.

Barriers for changing wage levels

The following list shows key challenges companies highlighted to us as well as the main arguments we provided in response:

  1. Suppliers are independent companies: Brands and retailers cannot pay supply chain workers higher wages as they are not their direct employers. Our view: Meeting living wage levels can be incorporated in supplier contract requirements.
  2. Changing wage practices requires regulatory action: Some corporates point at the role of governments to ensure that legal minimum wage levels are adequate without outlining a strategy in low-cost markets with persistent wage concerns. Our view: Where regulation and market mechanisms are failing, companies individually and collectively are responsible to encourage governments to rectify the situation of low wages.
  3. Ineffective payment systems: Standard supplier codes of conduct require compliance with countries’ legal minimum wage or the industry average. Many companies pointed out that the industry must first ensure pay arrangements are in accordance with contract agreements which are implemented consistently. Our view: Commitments to achieve living wage standards should be complementary to efforts targeting more fundamental shortcomings in pay systems.
  4. Competitive barriers: Companies hesitate to pay higher prices to suppliers for fear of putting themselves at a competitive disadvantage. Our view: Competitors sourcing from the same suppliers and factories also presents opportunities for cooperating on developing supplier standards in partnership and to achieve living wage levels over time.
  5. Calculating a living wage: The actual measurement and setting of living wage levels remains subject to ongoing debate and many companies argue better methodologies need to be developed before wage benchmarks can be adopted more widely. Our view: There are opportunities for brands and retailers to become part of the solution by contributing to the development of living wage estimates and benchmarks.

Purchasing practices & living wage commitments

Standard supplier codes used by most companies in our sample include requirements for wage levels to comply with the country’s legal minimum wage or the industry average. However, legal minimum wages in many low-cost sourcing countries fall short of meeting the cost of living. Companies that formerly recognize this difference between a minimum and a living wage in their supplier codes were more likely to have developed practices to improve supply chain wages.

All companies with specific living wage initiatives had reviewed their purchasing practices and considered steps to mitigate their impact on wage. The steps implemented included working with suppliers to improve productivity, developing more robust payment structures, and training programs for workers and suppliers on building social dialogue and industry relations.

Marks & Spencer and H&M were the only companies in our sample that had publicly committed to a timeline for improving supply chain wages. Other companies did not link their living wage programs to specific goals or timelines but focused instead on pilot projects that were being tested for their impact on improving supply chain wages. In addition, some companies like Adidas joined up with external organizations, such as the Fair Labor Association (FLA), which launched an ambitious fair compensation program that will benchmark data on supplier wages over the next years and measure progress among its members to increase wages.3

Wage benchmarks & transparency

Companies’ approaches to address living wage concerns have been met with some criticism, in particular the absence of any references to public guideline figures such as a living wage benchmarks. This omission has raised questions about ambitions and targets; at what salary figure will the company consider suppliers to have sufficiently increased wages?4

Moreover, a lack of commitment to specific targets and timelines to improve wages can create uncertainty about the overall accountability of corporate efforts. Companies and suppliers may have implemented business strategies aimed at enabling the achievement of living wages, but ultimately the results count: did workers in the end receive sufficiently higher wages? The findings of some pilots released so far suggest wage increases of just above the legal minimum wage, and still below widely used living wage estimates.

Corporate transparency on supply chains has improved generally, with companies like Adidas, H&M, Levi Strauss & Co, Puma and Nike having publicly disclosed their list of garment suppliers. This is an important development in as far it enables civil society to monitor wage improvements at factory level. However, beyond this transparency, companies have generally been reluctant to commit to set living wage benchmarks. Some have developed internal benchmarks, yet these have not been publicly disclosed.

Collaborative Approaches & Collective Bargaining

Instead of committing to public wage benchmarks, many companies prefer instead to support the establishment of appropriate mechanisms for determining wage levels, such as through collective bargaining agreements.

Most companies with explicit strategies on living wages work in close partnership with trade unions. Inditex, for example, was the first company in 2007 to sign a global framework agreement with IndustriALL which helped to reinstate workers expelled for being union activists, raise salaries and promote freedom of association in countries where unionizations has been weak. H&M also works with IndustriALL and other local trade unions to provide trainings for suppliers and workers.

Inditex, H&M and Primark initiated a top-down approach to improve supply chain wages: they joined efforts with a few other brands to work in collaboration with the global union IndustriALL on a program ACT (Action, Collaboration, Transformation) to kick-off industry level collective bargaining with national governments to improve minimum wage levels.5

Collective agreements, freely negotiated between employers, employees and elected trade union representatives, undoubtedly represent a crucial mechanism to address some of the structural power imbalances that can lead to an eroding of labor standards and wage levels. However, they are not mutually exclusive with using living wages benchmarks. In fact, most wage benchmarks include the input from multiple stakeholders, including employees.

When promoting collective bargaining, it is also important to consider the possibility of workers negotiating for wages below the cost of living, especially in situations with strong downward price pressures and unions operating in hostile environments. Therefore, the outcomes of collective agreements need to need to be carefully assessed within the context in which they were negotiated. In and of themselves they are not a guarantee for achieve living wage levels.

Conclusion & next steps

Achieving changes to supplier wage practices requires corporates to develop initiatives on a number of levels—ranging from scaling up pilot projects at factory level to working collaboratively on an industry level to influence market-wide standards. While a significant number of companies we engaged have recently launched new schemes aimed at addressing supply chain living wage issues, there are still few signs of any substantial progress. In most cases it is still too early to identify which programs are most successful in their implementation and outcomes. We are planning to review the progress of these initiatives as their results will be disclosed over the coming years.

In the meantime, we will be building on our engagement on the living wage theme by focusing on collective bargaining processes. The recognition of workers’ right to freedom of association and collective bargaining provide an important precondition for addressing many supply chain labor standards issues (such as reasonable working hours, health & safety, discrimination and wage levels). In 2016, we have begun asking brands and retailers to detail how collective worker rights are acknowledged in their code of conduct, and what steps are taken to enable effective collective engagement with workers in the supply chain.

 

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1 Ethical Trading Initiative (ETI): Living wages in global supply chains, 2015
2 Societe Generale: Social risk in the clothing retails supply chain, 2014
3 See http://www.fairlabor.org/
4 Labor behind the brand, 2016: http://labourbehindthelabel.net/wp-content/uploads/2016/02/DoWeBuyIt-spreadssml-1.pdf
5 ACT Factsheet: http://www.industriall-union.org/sites/default/files/uploads/documents/2015/Cambodia/act_factsheet2.pdf

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