Wage ladder: what’s next?

Livelihoods, Private sector

Ivo Spauwen The worldwide garment industry produces enormous wealth – surely workers can share in these gains? A question posed by today’s guest blogger, Ivo Spauwen of the Fair Wear Foundation, who writes in response to our report on labour rights in Unilever’s supply chain

In many garment production facilities, wages are too low for workers to meet basic needs. We need to develop effective mechanisms to enable workers earn a wage they can live on – in a reasonable number of working hours.

The idea of living wages is not a new one. The term has been used since the turn of the last century, and the concept is included in the United Nations Universal Declaration of Human Rights. In recent decades, living wages have come to the fore with the advent of codes of conduct and global supply chains. Nevertheless, the living wage standard is one of the most challenging to implement in garment supply chains.

Climbing the wage ladder

To help define and measure living wages, FWF (the Fair Wear Foundation) has developed the FWF Wage Ladder. This charts local estimates of a living wage by a wide range of stakeholders, as well as other wage benchmarks, such as the local legal minimum wage. It is a tool that visualises the gap between these wage levels, and can be used to chart wages in individual factories.

LadderSo far so good; but in most production countries, the gap between wages paid in garment factories and even the lowest estimates of a living wage is so wide, that raising wages to living wage level overnight does not seem realistic. A process approach, in which each step any factory takes to ‘climb’ the Wage Ladder is acknowledged and encouraged, is indispensable, as is the support of the buying

While FOB prices paid by buying brands are often too low to allow for the payment of living wages, merely raising these prices will not be enough. For one, a clothing brand is usually only one of many clients that buy from any given factory, which means that if one brand raises its prices, the impact on wages is only as big – or small – as the importance of that brand to the factory.

A wage increase that is small in absolute terms, will lead to a significantly higher retail price.

What’s more: most existing pricing models are an impediment to raising wages by the very way they are set up and need fundamental addressing: in most conventional pricing models, production costs (including labour costs and wages) are the basis for the FOB price, which is usually what a brand pays a factory. This FOB price is then raised a number of times to arrive, finally, at a wholesale and then retail price.

These increases are percentages, and therein lies the problem: a wage increase that is small in absolute terms, will thus lead to a significantly higher retail price. The profit margin of all parties along the supply chain, while staying the same relative to the FOB price, will increase absolutely – and will increase by a higher amount than the wage increase that goes to the worker!

To address this issue, FWF is currently working with its affiliated companies – all of whom have committed to ensuring the payment of a living wage at their suppliers – to investigate different pricing models. FWF worked with Fairtrade International in 2011/2012 to map a number of specific supply chains, collecting data about the relation between labour wages and retail price. Currently, FWF is conducting a more extensive study, supported by the European Outdoor group.

A practical challenge we are facing is to make sure that any price increase actually benefits the workers directly. Both management and workers should be involved in solving this issue. FWF is currently piloting ways to do this, with our local verification staff checking through worker interviews that the money was received.

Gaining a better understanding of the effect of raising wages on FOB and retail prices, and finding ways to ensure that a price increase directly benefits workers, will help underpin how the amount provided by a brand contributes to the realisation of living wages. So that step by step, clothing brands can start fulfilling their commitment, and workers can start earning a wage they can live on – and have a right to.

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Author: Ivo Spauwen
Archive blog. Originally posted on Oxfam Policy & Practice.