Wages at the End of the Supply Chain

Stephen DeAngelis

February 17, 2011

When people head to large national retail stores to buy products, their main concerns are quality and price. They seldom stop to think about where the products come from or whose hands produced them. That’s understandable. It’s not that people are insensitive; they believe that governments have an obligation to hold corporations responsible for the fair treatment of their employees. Additionally, it is not easy for someone in the developed world to know what “fair treatment” is in another location and in different circumstances. Having run across some articles dealing with wages at the end of the supply chain, I decided that a post on the subject would help readers remember just how connected the world has become. The first article is a blog post by a senior IBM consultant entitled The Living Wage. The IBMer writes:

“What is the connection between a Living Wage and the supply chain? Take a look at this report for instance: Why is Wal-Mart blocking 35 cents an hour for Bangladeshi workers? From that article,

‘Senior sewers are paid 1.7 cents for each pair of Wal-Mart jeans they sew. (Each worker must sew 10 pairs of jeans per hour, or one pair every six minutes—which is 10 percent of an hour. Ten percent of their 17-cent-an-hour wage amounts to 1.7 cents.)’

“That’s an hourly wage of US$ 0.17 for experienced sewers and the current demand is to raise the wage to US$0.35 (and up to US$ 0.51 by some accounts that I have researched). The obvious question is: Is an hourly wage of US$0.17 a living wage? Is an hourly wage of US$0.35 or US$0.51 a living wage? If you think that US$0.17 is an absurdly small number, what do you make of US$0.35 or US$0.51? If you’re mortified by the idea that the designer jeans that you’re donning tonight was sewn together in misery, will you be gratified by the notion that they will be paid double that wage if you just bully the capitalist/retailer to forgo that marginal hit to his profits?”

Of course, you can’t compare wages in the United States to wages in Bangladesh — that is why most people use Purchasing Power Parity (PPP) as the relative measure of well-being between populations. Investopedia explains PPP this way:

“[PPP is] an economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency’s purchasing power. The relative version of PPP is calculated as:

Purchasing Power Parity (PPP)

Where: ‘S’ represents exchange rate of currency 1 to currency 2; ‘P1′ represents the cost of good ‘x’ in currency 1; and ‘P2′ represents the cost of good ‘x’ in currency 2. In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency. For example, a chocolate bar that sells for C$1.50 in a Canadian city should cost US$1.00 in a U.S. city when the exchange rate between Canada and the U.S. is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.)”

By any measure, however, Bangladesh is a poor country. Its GDP is equivalent to the GDP of the state of Mississippi. Besides being poor, the country suffers from terrible flooding during most monsoon seasons. Frankly, I don’t know what a living wage would be in Bangladesh. I do know that Bangladeshis who are fortunate enough to have jobs work hard for the money they make. The fact that Bangladeshis are paid low wages does have one up side — those wages are starting to attract new businesses [“Bangladesh, With Low Pay, Moves In on China,” by Vikas Bajaj, New York Times, 16 July 2010]. Bajaj reports:

“[Gazipur, Bangladesh] is no mere rural backwater. It is the sort of place to which foreign manufacturers may increasingly turn, if the rising wage demands of factory workers in China prompt companies to seek new pools of cheap labor elsewhere. Already, in factories behind steel gates and tall concrete walls, tens of thousands of workers, most of them women, spend their days stitching T-shirts, pants and sweaters for Wal-Mart, H&M, Zara and other Western retailers and brands. One of the Bangladeshi companies here, the DBL Group, employs 9,000 people making T-shirts and other knitwear. Business has been so good that the company is finishing a new 10-story building with open floors the size of soccer fields, planted with row after row of sewing machines.”

A job, even a low-paying one, is generally better than having no job at all. If Japan, South Korea, and China can serve as examples, the lot of workers in low cost countries will eventually improve along with wages. But wages can’t increase if jobs don’t exist. Bajaj continues:

“As costs have risen in China, long the world’s shop floor, it is slowly losing work to countries like Bangladesh, Vietnam and Cambodia — at least for cheaper, labor-intensive goods like casual clothes, toys and simple electronics that do not necessarily require literate workers and can tolerate unreliable transportation systems and electrical grids.”

It is these low paying jobs that will eventually allow workers’ children to go to school. As factories grow, companies will demand better infrastructure and more reliable electrical power. These improvements will help low-cost countries attract even more investment. It’s a virtuous circle but it’s not an excuse for keeping wages unrealistically low. The IBM consultant notes that developing countries are not the only nations that fail to offer living wages. He points to a Penn State University site “that enables you to work out what constitutes a living wage in America, by state, by county – Living Wage Calculator.” The IBMer, however, believes that such calculations are artificial — as are the notions of minimum or living wages. He continues:

“[Calculating living wages] will do nothing to lift those Bangladeshi garment workers out of poverty and neither will it change the lives of those living stateside. … The poor will still be poor. … If you don’t believe what I say, take the hypothetical Bangladeshi worker who, through all the unrest in Bangladesh, doubles (from 17 cents to 35 cents an hour) or triples (from 17 cents to 51 cents an hour) his/her hourly wage. When that dramatic increase in wage happens, what I’d like you to do is tell me what happens to his/her life?

“1. Wage – we know this already because it is a given, doubled or tripled.
“2. Rent Cost – ?
“3. Transportation Cost – ?
“4. Food cost – ?
“5. Medical cost –?
“6. Taxes – ?
“7. Entertainment costs – ?
“8. Other costs – ?

“Do you think items, 2 through 7, increase, decrease or remain the same?”

I’m not quite as cynical as the IBMer. The facts show that millions of people have escaped poverty and joined the global middle class because they have had jobs — most of which were low paying. I have stated before that companies need to be careful about keeping wages artificially low. If they do, the inevitable result is worker unrest which could lead to violence. Recent events in the Arab world should convince even the most hardened skeptic that the average person is more empowered today than ever. Generating wealth is not a zero-sum game and workers deserve to benefit from their labors. The IBMer fears, however, that the corporate desire for profits is too strong to be tempered by the need for fairness. Bajaj reports that unrest is already growing among Bangladesh’s workers. He writes:

“While workers in Bangladesh and other developing countries are demanding higher pay, too — [there have already been clashes] between police and protesters … in a garment hub outside Dhaka — they still earn much less than Chinese factory workers. Bangladesh, for instance, has the lowest garment wages in the world, according to labor rights advocates. … Despite its handicaps, Bangladesh nearly doubled garment exports from 2004 to 2009. And the industry now employs about three million people, more than any other industrial segment in this largely agrarian country of 160 million. From June through November last year, garment exports accounted for more than 80 percent of the country’s total exports of $7.1 billion. Among developing countries, Bangladesh is the third-biggest exporter of clothing after mainland China, which exported $120 billion in 2008, and Turkey, a distant No. 2, according to the World Trade Organization. And with nearly 70 million people of working age, Bangladesh could probably absorb many more of China’s 20 million garment industry jobs.”

Jobs are a big deal — no matter where you live. If you recall, the riots in Tunisia that unleashed a wave of turmoil across the Maghreb mentioned above began because people didn’t have jobs. There will always be tensions between management and labor, but doing the right thing generally benefits both sides. Although the IBM consultant singled out Walmart as a bad guy in his blog, large retail chains that buy garments from Bangladesh have indicated that they are willing to increase wages. Not everyone in Bangladesh is happy about that. Bajaj reports:

“In January [2010], H&M, Wal-Mart, Gap, Tesco and other Western clothing buyers asked the Bangladeshi government to raise the minimum wage and reset it every year, although the group did not specify what the wage should be. A spokeswoman for H&M, Malin Bjorne, said the company was willing to pay more for clothing to help support higher wages. It is unclear whether other companies would do the same. But factory owners here argue that a big increase in wages would make them uncompetitive against Vietnam and other big producers, which have higher labor costs but also have better infrastructure and are more efficient producers. If that happened, Bangladesh’s China opportunity could prove all too fleeting, they say.”

Obviously there are no silver bullet solutions to the problem. I do believe, however, that management and labor must work together to find solutions or they will be left with only lose-lose outcomes. The second article on this subject that caught my eye was a review written by Andrew Stark, a professor of strategic management at the University of Toronto, about a book entitled The Fair Trade Revolution. [“The Price of Moral Purity,” Wall Street Journal, 4 February 2011]. He writes:

“On the opening page of ‘The Fair Trade Revolution,’ editor John Bowes relates an anecdote about Kuapa Kokoo, a Ghanaian cooperative where some of the world’s best cocoa originates. In 2000, a visiting BBC crew gave a chocolate bar to a local mother and daughter, filming their rapturous reaction on tasting it. Though the woman had worked all her life in the cocoa fields, she had never before eaten chocolate. She had no idea, Mr. Bowes writes, ‘of what it was about chocolate that made it so … appealing to people living thousands of miles away.’ It’s an affecting story. And certainly one of the results of the fair trade ‘revolution’—chronicled in Mr. Bowes’ book by several of its major figures—has been to help those at the far end of the supply chain, all over the developing world, gain a greater awareness of the developed-world consumers for whom they’re producing. But as the rest of the book makes clear, fair trade is actually much more about the opposite: prodding developed-world consumers to gain a greater awareness of those on the far end of the supply chain, in the remote villages, mountainsides and farms of the developing world.”

Stark asserts that the central premise of the fair trade movement is simple: “A certain type of consumer in North America and Europe will pay above-market prices for commodities such as coffee, bananas and chocolate, if he knows that this premium will be spent on higher wages for those who did the planting, picking and packing.” I’m glad he wrote “a certain type of consumer” will pay more because most consumers have time and again proven that prices trump idealism. Stark continues:

“Accordingly, a number of groups—members of the Fairtrade Labelling Organization International—fan out annually to visit tea plantations in Malawi, mango groves in Peru and a lot of places in between. Where the workers are reasonably paid, and as a result are schooling their children or moving up the supply chain into processing, the organization certifies their end products with official fair-trade labels. True, there are other groups in the labeling business, including environmental groups that dislike fair trade because it involves (think of the carbon emissions) transporting commodities over long distances. But over time the Fairtrade Labelling Organization International has succeeded in placing goods with large companies like Cadbury’s and even Starbucks, 1% of whose coffee, Mr. Bowes says, is now ‘fair trade.'”

Stark underscores what I wrote earlier, pay workers fairly and good things happen: children go to school; infrastructure is improved; and investment capital becomes more readily available. The fact that countries that promote fair wages are “moving up the supply chain” is another good indicator that win-win scenarios are possible. Stark, however, raises the question: “Is there anything wrong with using the market to promote social change in this way?” Stark continues:

“It turns out that fair trade attracts critics on either end of the spectrum. People on the right worry that whenever commodities are sold at above-market prices, consumers must be sacrificing utility and producers wasting resources. On the left, many slam fair traders for compromising their moral purity by working with large corporations. Free marketers, for their part, have little cause for concern. Fair trade’s above-market prices are not enacted by government; rather, they resemble other kinds of market-pricing arrangements. At any given time, some consumers will value a product—an airline seat, a hotel room—more than others do. Sophisticated algorithms allow airlines and hotels to figure out who they are and charge them more. In much the same way the fair-trade consumer thinks that a pound of coffee is worth more than other consumers do; he happens to place a higher value on the sweat and toil that went into it. And so he voluntarily pays more. As contributors Joe Human and Bruce Crowther note, he could get the same brew elsewhere for less. It’s his personal choice to pay a higher price, not a market requirement.”

Everyone who has ever bought a name-brand product over a generic brand of the same product has engaged in this type of behavior. “The fair-trade retailer, too, sells the same commodity at a higher price. He simply does so, as contributor Harriet Lamb notes, by linking his product with factual information about the conditions of the producers, not churning up subjective feelings in the minds of buyers.” Stark continues:

“The matter of business sincerity has always been a problem for social-responsibility activists. What usually steams them are companies that channel profits away from shareholders and toward social causes, knowing that—thanks to the warm and fuzzy public relations that result—they’ll actually boost profits in the long run. These firms don’t care about doing good, the rap goes, they care only about doing well.”

I’ve pointed out in previous posts that not everyone believes in corporate social responsibility (see, for example, my post entitled Dissing Corporate Social Responsibility). For another interesting take on this subject, read “Companies aren’t charities,” The Economist, 21 October 2010]. That article insists, “In poor countries the problem is not that businesses are unethical but that there are too few of them.” Stark concludes:

“Whatever the merits of such a critique, it doesn’t apply to fair trade. A fair-trade retailer isn’t cutting profits for easy publicity now only to cash in later from an improved image. It’s hiking the costs it incurs for labor and passing them on to consumers. Even if retailers wanted to, most couldn’t prove that they genuinely care about fair trade—care about it for reasons that have nothing to do with their bottom line—because ultimately it’s the consumer’s bottom line that takes the hit. If fair traders want to expand their movement, they’ll have to focus on winning over new consumers, one by one.”

As I noted above, winning new consumers won’t be easy. After all, Walmart didn’t become the world’s largest retailer by offering higher prices for the products it sells. That doesn’t mean that the fair trade movement should stop trying; it just means they must work harder to get their message across. I suspect that fair trade goods will never grab too big of a market share; but, a fortunate few at the end of the supply chain will benefit from the efforts of the fair trade movement.