A living wage remains an elusive dream for millions of workers on production lines around the world. But is it one brands can turn into reality?

A living wage remains an elusive dream for millions of workers on production lines around the world. But is it one brands can turn into reality?

How much money does someone need to survive in Cambodia? A little over $2 a day, according to the government, which has set Cambodia’s minimum wage at $67 a month.

Cambodian textile workers, who make many of the clothes on sale in the US and Europe, say this wage is derisory. In a report released at a living wage conference in May, a confederation of four national unions asked garment factories and clothing brands to pay workers a “living wage” – a minimum of $93 a month, or $3 a day. Cambodia is a major sourcing destination for western brands, but H&M and Puma were the only big names present at the conference out of seven top brands invited.

The Garment Manufacturers Association of Cambodia promptly rejected the report, saying higher pay would threaten factories’ profitability. But the case is far from over. A union representative, who wished to remain anonymous, told Ethical Corporation that the group would use the $93-a-month benchmark in all upcoming collective bargaining negotiations. A new round of labour conflict seems likely.

Brands must be hoping Cambodia does not go the same way as another major garment exporter, Bangladesh. In 2007, a wave of riots swept the country as textile factory workers protested against a legal minimum wage that had remained unchanged for 12 years. Workers argued that they could not earn enough to support themselves or their families.

Fifteen years of corporate responsibility initiatives in global supply chains has made a significant improvement in working conditions in factories that make goods for multinational companies. But the lot of workers has barely improved according to living wage campaigners. Even after working long hours – at times up to 16 hours a day without a weekly day off – their wage is not enough for a decent living.

A living wage is one that is adequate for someone to support themselves and their family. Few, including global brands, disagree that workers should earn enough for a decent living. But no one can agree on whose responsibility it is to provide this wage – and how much it should be.

Brands, trade unions and NGOs differ in their definitions of how a living wage should be measured, what the size is of an average family, and what exactly constitutes a decent living. Dozens of definitions, approaches and methodologies have emerged over the decade. But none is broadly accepted.

As a result, brands’ supplier codes of conduct tend to stipulate that suppliers should pay workers the legal minimum wage, but not a living wage. The minimum wage is set by national governments and, as the Cambodian unions will testify, is often far below what would be a living wage.

Complex issue

William Anderson, head of social and environmental affairs for Asia-Pacific at Adidas, says one of the challenges in setting a living wage is deciding how many dependants to include when defining the wage. Numbers vary widely according to the location and age of the workforce. “The simple fact is that an employer does not pay wages according to individual family circumstances or the number of dependants an employee has,” says Anderson.

“The main problem is how to define the living wage in a consistent way and making sure that it is auditable,” says Auret van Heerden, chief executive of the Fair Labour Association (FLA), the largest US-based multistakeholder initiative to monitor retailers’ supplier factories around the world.

Van Heerden recalls that when the FLA was being created in 1999, unions wanted a reference to paying a living wage to be included in guidelines for brands. Many companies opposed this, arguing that no one could define what a living wage was. The US Department of Labour was asked to find a definition and methodology for setting such a wage. A year later, it reported that providing a consistent definition of a living wage was impossible. The FLA decided to recognise the minimum wage rather than living wage until a definition and auditing method was found – effectively kicking the issue into the long grass. Ten years later, it is still there.

Like unions, NGOs want to reopen the debate. “It’s not true that a living wage cannot be defined. It’s not difficult to do it. But brands have to decide that they want to do it,” says Ruth Rosenbaum, executive director of US-based non-profit Centre for Reflection, Education and Action (Crea), which has researched and advocated living wages since 1993.

Rosenbaum says that the method that brands use to determine remuneration packages when they transfer their senior staff from one country to another, based on the cost of living, is similar to methodology that can determine a living wage. “If they can do it for high paid people, why can’t they do it for people who are not high paid?” Rosenbaum asks.

Everyone agrees that paying a living wage will increase the cost of production to some extent. But who should bear the cost? Sean Ansett, managing partner at Madrid-based consultants At Stake Advisors, says three questions must be answered before brands commit to a living wage. Will suppliers take smaller margins? Will retailers either take a smaller profit or be prepared to pass on higher costs to consumers? And will consumers be prepared to pay for a more expensive, “ethical” product?

But Noun Veasna, national coordinator for the International Labour Organisation’s Cambodia Worker Education Project, a capacity-building project, supports the findings of the unions’ living wage study. He contends that the costing practices adopted by retailers are not transparent. “Unions have asked brands and factories many times to share how labour costs are reflected in the overall costing for a specific apparel order. But they have always refused to disclose that in the name of confidentiality,” Veasna says.

Blame governments

Retailers blame governments in developing countries for lower wages. The governments invariably determine the minimum wage on the basis of the cost of consumption to meet workers’ minimum nutritional needs.

“The biggest challenge in securing higher wages in the garment industry across Asia is the political nature of the minimum wage process, where governments often fail to meet or closely match annual cost-of-living increases,” Anderson says. By curbing garment industry wages, Asian governments seek to support higher levels of employment in the general economy and also manage inflation, he adds.

“In developing countries the government’s foremost challenge is to meet the basic needs of the people and often the evolution of wages both in the public and the private sector unfortunately is not always enough to make ends meet,” says Tuomo Poutiainen, chief technical adviser for the ILO’s Better Factories Cambodia, which monitors garment factories under a bilateral textile trade-pact between the US and Cambodia in 1999. The agreement allowed garment exports from Cambodia on the condition of improving working conditions in factories.

Many governments in developing countries are also blamed for deliberately maintaining low minimum wages because of powerful lobbying from factory owners. Other reasons may include a desire to protect a labour-intensive export industry, such as clothing, which can bring in almost the entire foreign exchange earned by a country. Bangladesh, for example, earns more than 80% of its total foreign exchange from garment export. Higher wages could blunt its competitive edge when attracting foreign investment and export orders.

The FLA’s van Heerden says: “The governments should use an inclusive tri-partite process [that includes employers, workers and the government] which is transparent and representative of the stakeholders in the sector. In many parts of the world, this process is not being followed.”

Anderson adds: “When it comes to local minimum wage-setting, brands have no place at the table. In the more open economies, such Indonesia, this is a tri-partite process involving employer associations, governments and unions and in the closed economies, such as Vietnam, it is mandated by government alone.”

Most developing countries’ governments are unable even to enforce the legal minimum wages that they do set. “There is a challenge of how well-intentioned brands can ensure that at least the minimum wage is paid in their supplier factories. If you put on top of that the living wage, it becomes quite a daunting task for a brand,” says Doug Cahn, founder of the Fair Factories Clearinghouse and former director of human rights programme at Reebok International.

Blame brands

Some brands have made a commitment to ensuring a living wage for workers in their supply chains. Members of the Ethical Trading Initiative, a London-based multi-stakeholder initiative, pledge to persuade suppliers to pay workers enough to live on. The initiative was set up in 1998 and is supported by mainly UK and some US retailers. Critics say its living wage definition is vague and there is no clear methodology for implementation.

Levi Strauss, then an ETI member, refused to adopt the living wage clause, saying the principle was not properly defined. This promoted the ETI board to suspend Levi’s membership in December 2006. Unfazed, a Levi’s spokesman said at the time: “Our company code of conduct is completely actionable and we don’t want to include something we can’t really deliver. We support further work on defining what is a living wage, but at the moment we don’t want to include something aspirational in our code.”

A Levi’s spokesman told Ethical Corporation that the company believes in the principle that wages and benefits for a standard working week should be sufficient to meet workers’ basic needs and provide some discretionary income. But, he added: “Markets set wage rates. Where wages fail to keep workers above the poverty line, governments should set minimum wages consistent with the cost of living.”

A corporate responsibility commentator, who preferred to remain anonymous, said there was no public evidence that the remaining members of ETI were actually paying living wages. “Their commitment to living wage simply appears to mean that they would like to see it happening in the long term.”

The UK’s largest retailer, Tesco, an ETI member, continues to be accused by activists of failing to ensure that fruit pickers in its South African supply chain are paid a living wage.

Better alternative

But according to the FLA, a possible alternative exists to the living wage: the “wage ladder”. It is designed to benchmark factory progress in improving wages over time. The FLA is internally discussing whether to adopt the wage ladder system, which was developed by the Joint Initiative on Corporate Accountability and Workers Rights (Jo-In), a grouping of six organisations, in a collaborative pilot project in Turkey. The pilot was conducted in 2006-07 by Jo-In, and included the FLA and ETI, the Clean Clothes Campaign, the Fair Wear Foundation, the Worker Rights Consortium (WRC), and standard-setter Social Accountability International (SAI).

The wage ladder used in Turkey plotted the monetary value of various wage benchmarks in the country. These included the legal minimum wage, the prevailing respective industry wage, the union-negotiated wage, the basic need wage (measured by the SAI), the living wage (measured by the WRC) and the cost of living in Turkey as measured by trade unions. After the audit, the actual factory wage was plotted on the ladder to see how it compared against the benchmarks. The objective was to encourage the factory wage to move up the ladder over a set period.

“If the factory wage is below the reference points, we would ask the factory to do a root cause analysis to understand why the gap exists and how it could be eliminated through increasing productivity or quality or other remedial steps,” van Heerden explains.

The FLA is also considering a “fair wage” approach, which would involve analysing a factory’s wages in relation to the GDP growth of the country, the sales growth of the factory, and other variables such as the cost of living. “If the actual wage does not reflect movement in GDP and sales growth and cost of living, that will provide a basis for discussion with the factory for remediation,” says van Heerden.

Van Heerden says that once there is a consensus among the FLA members on the fair wage approach, it will be used in conjunction with the wage ladder. This year, the FLA has added a new statistical table in the audit process to capture wage data more effectively so that it can be used for analysis. But there is no target timeline to introduce these measures yet.

Uphill battle

Living wage advocates will have to overcome the realities of the market, where the supply of labour for low-end manufacturing exceeds demand.

Van Heerden says: “Whatever legal standards are set, whatever policy a brand might adopt, whatever demands trade unions might make, you tend to end up with a market rate which is determined by demand and supply of labour.”

He adds: “My second concern is that we increasingly see that market wage is fixed by global demand and supply of labour rather than by the national demand and supply. Because of increasing flow of labour across borders, a national government’s ability to set and hold its wages can be undermined by international availability of workers.”

Fixing wages at a level that is out of sync with demand and supply of labour would appear to be a task for policymakers. But Rosenbaum argues that only a collective action by the industry can address such a complex issue. Brands should jointly commission an independent study to determine a living wage for each sourcing market, she says. Then all companies should collectively agree to pay that wage. She says Crea is in the process of setting up a broad-based study of living wages using a set of indicators for 50 countries which companies can use to pay living wages.

There are already ominous signs in the air for the industry. In spite of stiff opposition from business groups, more than 120 living wage ordinances have been passed by various states and cities in the US in the past four years, meaning that companies receiving government contracts will have to pay a living wage, which is higher than the federal minimum wage. More than 75 campaigns are under way in the US asking the remaining states to adopt living wages.

Living wages are going to be a real test of multinational brands’ corporate responsibility. If they do not find a fair mechanism to ensure a living wage in their supplier factories soon, they may find themselves on the wrong side of the table with unions and activists.

Living wage definitions

Joint Initiative on Corporate Accountability and Worker Rights: “Wages and benefits paid for a standard working week shall, as a floor, always comply with all applicable laws, regulations and industry minimum standards and shall be sufficient to meet basic needs of workers and their families and provide some discretionary income.”

Ethical Trading Initiative, a multi-stakeholder group: “Wages and benefits paid for a standard working week meet, at a minimum, national legal standards or industry benchmark standards, whichever is higher. In any event wages should always be enough to meet basic needs and to provide some discretionary income.”

Social Accountability International SA8000 social auditing standard (basic need wage): “The company shall ensure that wages paid for a standard working week shall meet at least legal or industry minimum standards and shall always be sufficient to meet basic needs of personnel and to provide some discretionary income.”

Centre for Reflection, Education and Action, a living wage campaigner: “Sustainable living wages are wages that not only meet the basic needs of the workers and their families, but also provide for the setting aside of money for participation in culturally required activities, and planning for future betterment.”

Adidas: For the purposes of the fair wage study (2003), Adidas defined a “fair wage” to be: “The take-home pay and benefits received by a worker during a legal work week which allow the worker and their immediate family and/or dependants to meet basic needs and save a certain portion for long-term planning and emergencies. Basic needs include food, housing, education, childcare, healthcare, clothing, energy, water and transportation.”

Adidas sets benchmarks

Adidas commissioned a fair wage study for Indonesia with the help of local NGOs in 2001 and followed this with fair wage workshops with suppliers, unions and NGOs in Indonesia and the US in 2003.

The company has encouraged its suppliers to adopt wage-setting mechanisms that:

  • are transparent and have direct input from the workers, ideally through negotiation or collective bargaining, or through alternative legal means, such as a workers’ council or welfare committee;
  • benchmark basic pay at a level that is higher than the local minimum wage;
  • acknowledge and reward workers for productivity gains;
  • take into account data on general cost of living and workers’ needs;
  • are part of a broader and much improved human resources management system;
  • meet in full all legally mandated benefits; and
  • where practical, promote the development of worker cooperatives.

Knock-on effect of low wages

Social Accountability International’s programme director, Judy Gearhart, says the living wage is integral to a social audit. If a factory auditor wants to understand why workers are working excessive overtime, for example, they need to know whether or not workers are able to live decently on the wage they earn for just the regular hours, she says.

Gearhart explains that failing to pay workers enough to live can have a number of negative consequences. There could be child labour because parents, who are not earning enough, send their children to work. There could be bonded labour because workers who do not earn a living wage have to take loans, which they may struggle to repay. There could be health and safety issues when even sick workers want extra overtime hours because their normal wage is not a living wage.

If workers do not know how their wages are set, they most likely do not have freedom of association and collective bargaining, Gearhart says. And if employers do not pay a decent wage and do not value workers, their factories are less likely to have a good management system, a requirement for the SA8000 certification, she adds.

What to find out more about industry inititatives like Ethical Trading Initiative and Fair Labour Association? Check out the Guide to Industry Initiative in CSR - a new report just publlished by the Ethical Corporation Insititue.

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