Asia Floor WagePeople’s Tribunal on Living Wage

CambodiaFebruary 5-6, 2012

Asia Floor WagePeople’s Tribunal on Living Wage

CambodiaFebruary 5-6, 2012

Asia’s place in the Global Garment Industry the One-World Employer

• Asia the largest recipient of foreign investment also holds the largest workforce and represents most of the global working poor. Women comprise an increasingly significant proportion of the global working poor

• Before 1960: U.S. imported 5% of its apparel. Today: U.S. imports > 90% of its apparel from > 70 countries. The ILO calls the apparel industry the “true one-world employer”

• Largest concentration for garment production is in Asia; Asian workers have the lowest wage level. Scale of production, workforce, raw materials, technology, skills, and wage level, in Asia, cannot be easily replaced

• Asian labour cost can set a floor to the global corporate race to the bottom

Labour cost of a shirt in global supply chain

Component Cost (India) %Retail Price (India)

%Retail Price (Bangladesh)

Fabric $2.80 12.4% 14.2%

Label/Pkg $0.45 2.0% 3.2%

Labour CostLabour Cost $0.64$0.64 2.8%2.8% 2.8%2.8%

Overhead $0.59 2.6% 0.9%

Profit to tier1 $0.28 1.2% 0.9%

Wash $0.15 0.7%

FOB Cost to Brand

$4.90 21.8% 22.0%

Shipping, duty

$0.75 3.3% 3.3%

Total cost to brand

$5.65 25.1% 25.3%

Retail price $22.50 100%

Broader Political, Economic Context: Last Two Decades

• Workers Getting Poorer: Last two decades - wage share has been declining, indicating that workers are not getting their “fair share” of economic growth. Global economy grew at an average of 3.3% per year but annual wage growth was at 1.9 percent every year.

• According to the ILO, proportion of people on low pay (defined as < 2/3 of median wage) increased in more than 2/3 of countries; there are 555 million working poor, a significant percentage being women

• Growing Inequality: Top most layer (0.1%) in US economy increased its growth by 10 times but the median family only by 22%. The income of the CEO of General Motors compared to the average worker used to be 1:70; today this gap in Walmart is 1:140.

• Roll Back of Hard Won Gains: Precarious jobs overshadow hard-won securities won in the 20th century. According to the ILO workers in vulnerable employment is1.53 billion workers -- >50% world’s workers

Arguments againstRaising Any Wages

• This is a bad time -- Economic Downturn

• Consumers will stop buying -- Drop in Sales

• Business is down -- Loss of profits• Shareholders will panic• Factories will close

Decent Work in Asia will helpGlobal Economic Recovery

Purchasing power of the vast majority is falling ; workers getting poorer

Financial analyst Richard Duncan argues that the global economy’s well-being rests heavily on Asia’s ability to consume more than it manufactures. He advocates for a $5 minimum wage for Asia (Jan 2009, Newsweek)

Raising Wages Decreases Inequality & Increases Purchasing Power

Asia FloorWage sets a floor that helps bring the bottom up.

Inequality can grow in one of three ways:

Drop in Sales: Unfounded Fear

• Scholars have studied whether business expands or contracts during wage increases and have found the cost to be minimal.

• Scholars show the effect to be less than 1% on sales revenue. • The AFW is formulated based on the paying capacity of the

global industry whereas national wage definitions are based on the paying capacity of the national industry.

• Garments’ sales rarely suffer; in fact, research shows that even when prices rise, sales continue.

• Apparel imports of the U.S. increased by13.5% in January-April 2011 from same period in 2010 and amounted to 23.2 bn dollars.

• US imports of apparel from Asia increased by 8.3% to 29.7% by various Asian countries.

Garments prices are going down

Garments prices are going down

Wage Increase & Retail Price

One Brand’s Financials2010 First Half

• Earnings per share were at € 8.48 compared to € 2.92 prior year.

• Earning Before Tax increased by 185,5% to 181 million

• Consolidated sales up by 2.5% • Net earnings totaled € 44.8 million versus € 38.5

million, representing an increase of 16.4%.• Gross profit margin reached 51.3% after 51.1%

previous year.

Previous Cited Hurdles to Delivering Living Wage

• No consistent, actionable definition– AFW Formula

• Global North demand, no Asian voices– AFW Alliance is Asian-led

• Relocation of production– The AFW Alliance’s regional strategy overcomes the

competitive divisions among Asian countries by a formulation that delivers living wage without compromising the competitive ranking of the countries. The Asian labour organisations have developed a regional bargaining group.

How do we calculate for a fair and decent living wage

for workers across Asia?

What are the components of a worker’s WAGE?

• FOOD COST (FC)• NON-FOOD COST (NFC)

FC and NFC are estimated without subtle internal differentiations,

the goal being to provide a robust regional formula which can be further

tailored by trade unions in different countries, based on their needs and

context.

• WAGE = NFC + FC

Wages and Food Costs

• Poor people in developing countries spend a large percentage of their income on food.

• When food prices rise, families are able to purchase less of other needed goods and services.

• Women and children are usually the worst hit.

India (urban)

India (rural)

U.S.

U.K.

France

Mexico

FOOD

• Varies with local food basket• Different food baskets can be

represented by the common measure of caloric content (e.g. a meal of 700 calories)

Food in Calories• June 1999, the Economic and Social Commission for Asia and the

Pacific (ESCAP): “the per capita food intake for survival assumed for deriving the food poverty line varied...from 2100 calories to 2750 calories per capita per day.”

• 2000 Chinese government statistics plus a study by the Food & Agriculture Organisation: the calorie requirement of the national poverty line for China was 2,400 kcal/day (now revised to 2100 kcal), while that used by the FAO is 1,920 kcal/day.

• 1957 the Indian Labour Conference: 2700 calories for minimum wage for an adult worker (performing moderate to heavy physical work).

• Most recent, the Indonesian government: 3000 calories as the intake figure for a living wage for a manufacturing worker .

• The AFW should not result in lowering standards in any country. So the AFW Alliance agreed to adopt the Indonesian standard.

Question 1: HOW MUCH OF WAGE IS

“FC”?FOOD Component in Various Asian WAGE DEFINITIONS

(official figures) (1 adult per day)

INDIA: 2700 Calories 47.48% of WAGE

BANGLADESH: <=1500 Calories 67% of WAGE

INDONESIA: 3000 Calories 44.22% of WAGE

SRI LANKA: 1900 Calories 62% of WAGE

NON-FOOD

• No agreement on a universal set of non-food items

• ITEMS: Housing, clothes, healthcare including maternity care, childcare, education, fuel, transportation, savings, etc.

• To simplify, NFC items can be expressed as a common factor of FC. (e.g. NFC of a family as ½ of its total FC).

Question 2How much of WAGE is

“NFC”?NON-FOOD COSTS in Working Class WAGE as

a factor of FC (official figures)

• INDIA: NFC = FC • BANGLADESH: NFC = ½ FC • INDONESIA: NFC = 1.26 x FC • SRI LANKA NFC = 0.6 x FC

Final AFW Formula• FOOD COST @ 3000 calories food

basket/adult/day for a family of 3 consumption units

• NON-FOOD COST = FOOD COST

• AFW = NFC + FC = 2 (FC)

AFW and the Family• Living wage definitions normally includes the family. Minimum

wage regulations, by contrast, may (India) or may not (Indonesia).

• The AFW unions decided to base AFW on a family. The AFW Alliance studied the family sizes in key Asian countries and came up with a more or less average figure. (e.g. Ministry of Labour in India calculated the average working class family size to be 4.46 in 2008 and the Ministry of Commerce in China calculated the average family size in China to be 3.38 in 2003).

• In order to account for childcare costs, the AFW makes it a single income family.

• The AFW is based on 3 adult consumption units (a child is calculated as ½ consumption unit). 3 consumption units can be a family of 2 adults and 2 children or 1 adult and 4 children or 3 adults.

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Calculate in local currency

• This definition can be used to calculate floor wage

levels for garment workers in different countries. – Collect information on a daily food basket of 3000

calories, in each country. This should be based on reasonable and average market costs

– Multiply this by 30 days to arrive at a monthly cost.

– Multiply this by three ‘consumption units’

– Finally, double it to cover non-food costs.

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AFW in local currency 2009

Food basket (1 CU) (Foodbasket 3 CU) FC + NFC

Bangladesh 1575 4725 9450 TakaChina 193 579 1158 YuanIndonesia 389200 1167600 2335200 RupiahIndia 1282,50 3847,50 7695 RupeeSri Lanka 2500 7500 15000 RupeeThailand 1250 3750 7500 Bath

AFW and Benefits• The AFW is a basic wage figure prior to benefits such as

healthcare, pension and so on.

• Delivery of other benefits by employers to workers is not the norm in the industry; therefore, they have not been made the basis for AFW.

• Even if employers provide dormitory housing or canteen lunch,

workers should have the option to obtain these basic necessities from the wage and not be at the mercy of the employer for basic needs.

• The AFW provides a minimum living wage with which a worker can support him/herself and dependents.

AFW and Working Hours

AFW defines the regular work week as a maximum of 48 hours prior to overtime.

AFW’s definition of a work week and its independence from benefits sends a clear message that workers need to earn a minimum living wage without sacrificing other humane working conditions.

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Compare wage between countries

How to arrive at a common AFW?

Since wage surveys take place in local currencies, we need to address two main problems:

a. Fluctuating exchange ratesb. Different price levels

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Purchasing Power Parity

• A meaningful comparison of the national wage surveys must therefore take into account the different costs of living and, thus, equalise the spending power of different currencies.

• A possible solution to these problems comes from the notion of ‘purchasing power parity’ (PPP).

• PPP can be used to calculate how much money is needed by a person outside the USA to buy the same basket of goods that a person in the USA can buy.

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AFW Figure for 2009 in PPP

The next step is to establish a common AFW figure, based on PPP$, which can be used in campaigning, lobbying and negotiation.

A common wage figure thus can only be the result of consensus among the groups that participate in the campaign

AFW for 2009 is set at 475 PPP$

PPP CONVERSION FACTORCOUNTRY PPP FACTOR

(2005)PPP FACTOR (2009)

CHINA 3.45 4.2

INDIA 14.67 19.2

BANGLADESH 22.64 31

INDONESIA 3934 5375.9

SRI LANKA 35.17 58.9

CAMBODIA 1279 2086.5

VIETNAM 4713 8260.5

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Convert AFW consensus PPP figure into local currency

Convert the common Asia wage figure of 475 PPP$ (for 2009) back into national wage figures.

AFW at 475 PPP$ converted into local currencies

Bangladesh 475 PPP$ x 22.64 = 10754 takaCambodia 475 PPP$ x 1279 = 607525 rielChina 475 PPP$ x 3.45 = 1638.75 yuanIndia 475 PPP$ x 14.67 = 6968,25 rupeesIndonesia 475 PPP$ x 3934 = 1868650 rupiahSri Lanka 475 PPP$ x 35.17 = 16705.75 rupeesThailand 475 PPP$ x 15.93 = 7566.75 baht

Country

Minimum Wage

(in local currency)

PPP Conversion factor for 2009 AFW 2011 in PPP

AFW in localCurrency

Bangladesh 3000 31.04 540 1676

Cambodia 250899.1 2086.5 540 1126710

China-Schenzhen 1500 4.2 540 2268

India 5034 19.2 540 10368

Indonesia 1529150 5375.9 540 2902986

Sri Lanka 7900 58.9 540 31806

Vietnam 1400000 8260.5 540 4460670

AFW in 2011

Country

Minimum Wage (in local currency)

PPP Conversion factor for 2009 MW in PPP

Bangladesh 3000 31 96.7

Cambodia 250899.1 2086.5 120.25

China-Schenzhen 1500 4.2 357.14

India 5034 19.2 262.19

Indonesia 1529150 5375.9 284.45

Sri Lanka 7900 58.9 134.13

Vietnam 1400000 8260.5 169.5

MW in PPP

Responsibility for Paying AFW:Brand Power

• Brands and Retailers’ financial power is built through the garment global supply chain.

• Brands power is built by their access to high price consumer countries and low labour cost production countries and by their ability to deny this access to Asian manufacturers.

• Brands and retailers are “manufacturers without factories”, with the physical production of goods separated from the design and marketing.

• Brands have lavish advertising budgets to market their brand• Brands through the use of sophisticated and costly information

technology increase their revenues and lower risks by passing on risks and responsibilities to suppliers.

• Brands and Retailers’ sharing a negligible fraction of their profit can dramatically raise millions of workers and families out of poverty.

Brands Profit: Low Prices & Low Wages

Prices that brands pay to the manufacturers in Asia have decreased, reducing the profit margins of Asian manufacturers, which depresses the low poverty wages production workers continue to get.

Brand rely on consumers, despite falling income, to buy by depressing prices and pressing down on wages at the production end.

Much of the emphasis on competitiveness has focused on production costs and, in particular, labor costs.

Import Price Trends on garments from Non EU countries into the UK

2000-2009

AFW & Fair Pricing• Global sourcing companies pay approximately the same prices to

their supplier factories in Asia: around 25% of the retail price.

• Garment workers’ wages make up a very small proportion of the final retail price for clothes – around 1% to 2% – substantial wage rises could be achieved without increasing retail prices.

• Scholars have found that brands force supplier companies to operate below production costs by demanding low prices, therefore causing wages to be adversely affected.

• The proposed demand is an Asia Floor Wage for Asian garment workers in conjunction with fair pricing that would make Asia Floor Wage possible.

Pricing & Labour Cost

• Doug Miller’s report: A key finding is that fashion retailers are not engaged in any systematic costing of the labour input into garment manufacture.

• The imprecise clarification of “labour minute values” and factory efficiency is a significant factor in the chronic persistence of factory non compliance on wages and overtime.

• It is possible to calculate a labour minute value for any garment, which also incorporates a living wage element.

• It is possible to determine and ‘ring fence’ the agreed labour cost and to make this an explicit part of the commercial contract between the buyer and the supplier, in the same way that fabric is itemised in negotiations.

Price Negotiation• Ken Loo, General Secretary of the Garment Manufacturers Association

of Cambodia 7.12.2009 : “The buyers nowadays come to us with the specifications of the garments they want produced.......what generally happens is that the factories are given a … price as a lump sum value and the factories are left to manage it as they like. In this case, there is some haggling and negotiations about providing a longer standard time in order to get a higher …price. In most cases however, there is just a negotiation to obtain a higher …price without much reference to the standard times. ... We are left to manage our own costs and the buyers generally adopt a take it or leave it attitude when it comes to the price they provide to us.”

• Whilst a company like GSD (Corporate) Ltd. which specialises in predetermined time studies, can report an increase in the number of manufacturers which are turning to the studies, the number of brands and retailers using this approach in labour costing and garment pricing is negligible.

Central Database of Standard Times

• If a buyer is to engage in sustainable labour costing then a library of standard times most certainly for generic items will be required

• Standard minute values calculated for new styles would need to be added to the central database

• It is important to note that in work study parlance, ‘efficiency’ and ultimately productivity is the responsibility of factory production management and not the worker. Scholars have asserted that when the factors associated with productivity are reviewed, it becomes clear that most .....are of techno-managerial nature

• However in the same way that buyers and merchandisers have to keep track of material costs, so too should they maintain and update a database of minute values and labour costs for the factories. 

Ring Fencing of Labour Cost

• “Ring fencing” the labour cost would force brands and suppliers to address the issue of how the factory is operating since the basic minimum wage would be the same regardless of factory efficiency.

• Labour cost is one of the most suppressed costs of production. Other factors of production include quality of infrastructure, access to raw materials, technology, energy, transportation, quality of management, legal systems, etc.

• Yet another factor in production costs is the purchasing practices of buyers which include lead time, quantity of order, advanced planning, etc.

• The AFW fixes the labour cost and would reduce the tendency of industry and government to compete solely on this human factor and turn their attention to other factors which will bring about efficiency, higher productivity, better production and sourcing systems and so on.

Transparency• An initiative involving labour costing will require a high degree of

transparency and openness between sourcing companies and their suppliers

• Some buyers insist unilaterally that their suppliers ‘open their books,’ during price negotiations, a practice which some observers see as naked power play in an attempt to drive prices down. In such circumstances, it is argued, suppliers have no other option but to hedge by distorting their figures.

• A more cooperative ‘open book costing’ will require integrity measures on the part of buyers such as price increases, long term supply agreements and the offer of productivity expertise where available.

• Buyers will also require an assurance that the additional amount of money identified as the living or sustainable wage element in excess of the current prevailing unit labour costs is reaching the workers.

• AFW Alliance has shown willingness to participate in helping branbds to develop such mechanisms

Brands’ Responses to AFW• AFW is based largely on ideologically motivated assumptions rather than

facts; it imposes a static system which interferes with the normal operations of a market-driven situation, rather than looking at innovative ways of using the market to drive issues in that same direction.

• The model is too simplistic in the sense that it makes no reference to other important players in the supply chain by only focusing on one group not taking into account the consequences this may have to the wider social and labour environment.

• AFW makes a “useful contribution” to the debate on living wage and they are glad a proposal as been made based on a clear methodology.

• They do not feel able to endorse the Asia Floor Wage as they don't believe it is possible to implement it.

• Increasing price is not something they are prepared to consider in order to implement a living wage; it would damage their competitiveness.

• Increasing the labour costs could and should come from increasing efficiency not increasing prices.

Brands’ Responses to AFW contd.• It is not the buyers role to force increases in wages, this has to be decided

on at factory level and through government increasing minimum wage. • At the moment their audits don't gather wage data at all and only record

wages if there is a violation (e.g below minimum wage). • Some auditors are using AFW as part of their wage benchmarking and

have produced an analysis of the gaps between average wages collected through their audits and the AFW benchmarks.

• AFW provides a good benchmark for a living wage, allowing greater transparency. Surprised at how good the AFW concept -- “might have legs”....

• 2/3 of their customers would shop elsewhere if they connected to labour rights abuses. 

• The topic of living wages should not be a campaigning issue against companies but should rather be addressed through a strong CSR-program and at the political level by the UN and ILO, G20, ASEAN and governments.”

• Confident that in the majority of cases, the prices they pay to suppliers are already adequate to cover a FLW – it’s just that factories are inefficient, and/or owners are grabbing too much value.

What can Buyers do Immediately?

• Publicly endorse AFW as a viable benchmark for living wage

• Adopt living wage as an integral part of sustainable production

• Develop a pricing mechanism for making AFW deliverable

• Work with workers organisations to implement AFW with their core suppliers