As countries from the U.S. to Cambodia debate raising the minimum wage, the issue is forcing companies — including retailers and fashion brands — to balance the drive to give workers a better standard of living with the need to manage their costs.
The issue has become one of the Obama administration’s key focuses in 2014, and took center stage in the President’s State of the Union address Tuesday night and continued Wednesday as he took his message on the road, stopping at a Costco store in Lanham, Md., where he praised Costco president and chief executive officer Craig Jelinek for paying his employees well above the federal minimum wage rate.
“Profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover,” Obama said in his address. “We should, too.”
Obama urged Congress in his address Tuesday to pass a bill increasing the national minimum wage to $10.10 an hour from $7.25. Obama also said he plans to issue an executive order in the coming weeks requiring federal contractors to pay their federally funded employees a “fair wage” of at least $10.10 an hour. In 2007, President George W. Bush signed the first increase in the minimum wage in nearly a decade. The law lifted the wage rate to $7.25 an hour from $5.15 over the next two years.
“Of course, to reach millions more, Congress needs to get on board. Today, the federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here,” Obama said in his address, lending his support to pending legislation that would lift the wage rate to $10.10. “This will help families. It will give businesses customers with more money to spend. It doesn’t involve any new bureaucratic program. So join the rest of the country. Say yes. Give America a raise.”
The groundswell in the U.S. — including demonstrations in November outside McDonald’s restaurants and Wal-Mart stores — has raised questions about the impact it could have on the mini revival in domestic textile and apparel manufacturing. It has also reopened the debate in the retail sector about whether a minimum wage increase could have a direct impact on hiring levels.
“We welcome the president’s focus on the economy and jobs, but a minimum wage hike runs counter to that goal,” said Matthew Shay, president and chief executive officer of the National Retail Federation, said Wednesday. “Raising the minimum wage would place a new burden on employers at a time when national policy should be focused on removing barriers to job creation, not creating new regulations or mandates.”
However, Bill Simon, ceo and president of Wal-Mart U.S., said last week that there might be some “wage compression” if the federal rate is raised, but said the discussions are in the formative stage. He also noted that Wal-Mart is not primarily a “minimum wage payer,” noting that less than 1 percent of its workforce is paid at the minimum wage level.
“The reason why minimum wage is on the table as a national discussion is that we have had no wage increase in six or seven years because…the economy is not growing at the rate we would like it to be,” Simon said. “We have got to have growth in this country. If we do, wages will follow and if the government wants to set the minimum wage at a rate it thinks is fair and acceptable, we as businesses will adapt to that and move forward, but it has got to come with growth.”
Several states have moved independently to raise their state wage rates. New York passed a three-step wage increase last April that will boost the rate to $8 an hour in 2014, $8.75 in 2015 and $9 in 2016. California Gov. Jerry Brown signed legislation in September that will raise that state’s minimum wage rate from the current $8 an hour to $10 an hour by 2016.
Further pressuring U.S. corporations is growing pressure to increase wages in less-developed apparel manufacturing nations like Bangladesh and Cambodia. Labor rights advocates have long called for increases in wages for garment workers, arguing that in many countries the rates are so low that workers can’t afford to put food on the table for their families. The pressure has also prompted some apparel executives and industry groups to become more proactive in pressing foreign governments to increase wage rates, or to at least adhere to the legal rate, even as rising labor costs threaten to put a squeeze on margins.
Several major garment-exporting countries to the U.S. have raised their minimum wage rates in recent months, following widespread worker protests and strikes. Cambodia increased its minimum wage to $100 a month from $80 a month, while the Bangladeshi government increased the garment industry’s minimum wage on Dec. 1 to $68 a month from $38 a month. Workers and unions in both countries are asking for higher rates.
The minimum wage in other key apparel suppliers has also risen, to $71 a month in India, $74 in Sri Lanka, $79 in Pakistan and $78 in Vietnam.
“Minimum wage rates in the garment industry have long been repressed and are now really getting to the boiling point, where you are seeing workers from Bangladesh to Cambodia to Haiti, who are all fed up with poverty wages, demanding a fair wage, a living wage…to cover all of their basic costs,” said Liana Foxvog, director of organizing at the International Labor Rights Forum. “One of the responsible parties in the minimum wage debate is the multinational brands and retailers whose responsibility should be to pay fair prices to garment factories in order for factories to in turn be able to have the financial wherewithal to pay higher wages. Instead, what we are seeing in the minimum wage debate is that all too often brands are silent on the wage issue and the factory owners may feel they can’t give much of a raise if companies aren’t going to pay a higher price to them.”
Several industry groups are becoming more vocal. Six North American retail, apparel and footwear associations sent a letter to Cambodia’s prime minister and other labor and garment officials on Jan. 15 urging an immediate end to the violence that has roiled the country and seeking a resolution in the dispute over the country’s minimum wage rate.
“Our industry is committed to ensuring that all the products that they produce, source and sell are manufactured under lawful and humane conditions,” the groups said in the letter. “As part of this commitment, we are committed to promoting the safety and security of workers in our supply chains.”
Rick Darling, executive director of government and public affairs at Li & Fung Trading Ltd., which uses some 15,000 factories globally, said in an interview: “The issue in emerging markets becomes the balance between improving the lives of a workforce and remaining competitive in the global apparel market. From our perspective, we actually see the evolvement of wages being paid to workers in these countries as a positive overall, for the workers and for the industry itself.”
Darling said he doesn’t expect the wage hikes in Cambodia and Bangladesh to affect sourcing from those countries, adding that business there should be “somewhat stronger” this year.
“We don’t see a migration away from those countries based on the current labor situation,” he said. “I think you are going to see wages rise around the world, and I think it’s a natural evolution. The apparel industry leads many economies in terms of the entry point into the global economy.…I think increased wages over the foreseeable future is something we will be dealing with in probably most countries.”
Edwin Keh, a lecturer at the University of Pennsylvania’s Wharton Business School, said the wage increases will have the biggest impact on middle-tier companies such as Gap and H&M.
“They will feel the brunt of it,” Keh said. “The most price-sensitive products will be impacted, but if you look at luxury brands, labor cost is a pretty small percentage, and discounters usually do a tremendous volume and have a lot of opportunities to solve problems associated with wage increases.”
Experts generally agree that the minimum wage increases will not significantly raise unit garment costs. While there might be subtle shifts in production due to the wage increases, no significant changes are expected among the top 10 apparel-exporting countries to the U.S.: China, Vietnam, Bangladesh, Indonesia, Honduras, Cambodia, Mexico, India, El Salvador and Pakistan.
China, the top apparel and textile supplier to the U.S., is expected to gain some share from other Asian countries, even though it has implemented a five-year plan that will eventually double wages.
“If you are a brand owner, there is one thing you do know about China and that is it costs more, but you get your goods out and you can sleep at night,” Keh said.
The minimum wage issue is not isolated to Asia. A trio of Haitian union leaders visited Washington in early January to hold discussions with three major North American companies — Hanesbrands, Gildan and Fruit of the Loom — about what they said is the country’s failure to enforce its legally mandated wage rate.
A Worker Rights Consortium report issued in October alleged that Haitian garment workers were being denied about a third of their legally mandated and earned wages since 2009 due to illegal practices by employers.
“We are seeking two things from companies,” said Yannick Etienne, director of the international solidarity commission of ESPM-BO, a federation representing 10 garment unions in Haiti. “One is that they accept to tell their subcontractors in Haiti to respect the law. The second is, since there has been wage theft and they have been in noncompliance since 2009, we hope that we can find a compromise or agreement to get some back pay.”
Gildan and Fruit of the Loom have pledged to ensure that their suppliers come into compliance with the Haitian minimum wage law and pay 300 gourdes, or $6.86, a day, and will continue to meet with union leaders.
In the U.S., many experts don’t expect a federal wage rate increase to adversely impact the manufacturing industry. The majority of workers in the textile industry are already paid well above the federal rate, and textile mills are highly automated.
“I don’t think it would impact us directly,” said Bill Jasper, chairman and ceo of Unifi Inc. and chairman of the National Council of Textile Organizations. “Most companies in the textile supply chain, whether they are yarn weavers, knitters or even cut and sew, pay so much higher than the minimum wage rate today, and any increase in the minimum wage will probably have little direct effect on the bottom line.”
Jasper said the average wage rate for U.S. textile workers is $13 to $14 an hour.
On the other hand, Jasper said, “The impact of escalating minimum wage rates in countries like Cambodia and Bangladesh and other places will probably amount to a positive for us. As costs go up in these countries, not only the cost of producing a garment but also transportation costs and others, it becomes more and more financially attractive to bring production back to this region.”
Keh of the Wharton School said industrialization in emerging economies is changing the whole concept behind offshoring.
“I think this wage arbitrage that has worked for the last 30 years since Nixon shook hands with Mao is certainly getting narrower and narrower,” Keh said. “In the Seventies, Eighties and Nineties, there were still huge chunks of the developing world that were agrarian, but more and more countries like China are industrializing and more people are living in cities rather than in the countryside, so the whole rationale for going offshore in the first place is changing.”
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