Solving the Problem of Declining Wages

Many companies have internal audit teams that are truly dedicated to making human and labor rights a reality in their global supply chains, often by working with local civil society groups. So why are there still so many factories that do not pay the hourly minimum wage and work 60, 70 or more hours per week? The first reason is that they operate in jurisdictions where there is no culture of compliance. None of their competitors is paying the hourly minimum wage or sticking to the legal limits on working hours, so why should they? The second reason is that they can. These factories are invariably located in labor markets where there is an oversupply of labor and workers will line-up for jobs on terms and conditions below the legal minima. The third reason is that they face tremendous competition. Prices and lead-times are being constantly squeezed and the factory responds by working harder rather than smarter.

Some critics blame the multinational buyers for this situation. This is too simple an explanation. Those export factories were often not paying the minimum wage before the multinational buyer arrived on the scene and tried to implement its code of conduct and audits. Nor is this a function solely of global competition. The factories across the street supplying the domestic market in the U.S. are not respecting the labor laws either. Global competition is not helping and many foreign buyers are part of the problem, but they are not the problem.

Critics of codes of conduct have gone so far as to declare them a failure because after ten years of intense auditing, the minimum wage is still not being paid in many factories. This is like saying that the medicine is a failure because we still have illness. People get sick all the time, but we do not blame doctors for the sickness. We might criticize doctors for not treating the illness effectively enough, and particularly for not removing the root causes, but we cannot blame them for the existence of the malady. The same applies to social auditing. It is intended to take the temperature of the factory so that we can diagnose the illness and treat it. Like disease, some of the problems that social audits uncover are functions of broader social factors. Take real wages, for instance. Research shows that real wages have been declining all over the world relative to GDP, profits, and the cost of living. No single company, or even group of companies, can be held responsible for that macroeconomic condition, and no group of companies can change it on its own.

Does this mean that companies should not be trying to enforce the minimum wage in labor markets where the supply-and-demand situation does not support it? Absolutely not. Employers have a duty to respect the minimum standards set out in the law, including the minimum wage. Every buyer has a duty to find out whether its suppliers are respecting those standards, and if not, to attempt to use their leverage to get them to raise their standards. But macroeconomic trends and the business cycle can present major obstacles to achieving and maintaining the standards we would all like to see upheld, and the failure to recognize this could result in the baby being thrown out with the bath water.

Are low wages a function of the price? Would the factories pay more if the prices they received increased? The answer, unfortunately, is probably not. In many labor markets the link between wages, productivity and profits has been broken. Recent International Labour Organization (ILO) research demonstrates that the wage share has been declining relative to GDP growth, profits and cost-of-living, and the declines are steepest in the fastest growing economies. This is a highly troubling development since it means that those societies are becoming more unequal and workers are not receiving their fair share of the economic growth they contributed to. Paying higher prices to suppliers in those countries would therefore not automatically feed through to higher wages. The problem in those economies is not that there is not enough money to pay higher wages; it is that there is not enough pressure to pay higher wages. The trade unions that could pressure for higher wages are not strong enough to do so, and let’s face it, most employers are only going to pay as much as they have to. Therefore, if the workers’ organizations are not able to push for higher wages should we be expecting the international buyers to do so? My answer would be yes. It is a question of doing the right thing. If a buyer sees that workers are not getting the minimum wage, this should become part of the negotiations over future orders. Buyers should take a look at productivity and see if wages have been moving in step with productivity rates. One could go even further and ask if workers are getting their fair share of the company’s profits in the form of wages. Profit rates are generally very hard to uncover since most of the factories are privately held and those numbers are kept from buyers, tax collectors and even banks, so it will be difficult for anyone to assess whether wages are moving in harmony with profits.

It may be possible to establish other indicators of growth, however, and to see how wages track in relation to those indicators. The FLA will start to do this from now on, so that we at least have the data to establish whether wages are fair. Better collection of wage data and comparisons with productivity and cost-of-living data will provide an objective framework within which we can devise remedial strategies to redress wage inequality. Simply blaming buyers and the prices they pay is too simple – it is a one-dimensional view that will not provide the context necessary to address the problem (and it is a big problem). We need concrete data as a starting point for root cause analysis that can provide the basis for remedial strategies. These strategies will take time to implement, which means we will need to set up key performance indicators to monitor progress and to provide some degree of accountability. The remediation will also need to address the sustainability issue – will the factory continue to pay at least the minimum wage and to give workers their fair share of productivity and profit growth? The best way to ensure that would be promote social dialogue within the enterprise, so that workers and employers can resolve these issues on their own. That is what we mean by sustainable compliance.

Auret van Heerden

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