Is the Living Wage movement economically feasible?

The Alta Gracia programme in the Dominican Republic is a real-world example of a theory that it’s possible to pay garment workers in poor countries good wages. Dispassionate study of the programme isn’t a good advertisement for it.

One remarkable aspect of the West’s reaction to the garment factory tragedies in Pakistan, Bangladesh and Cambodia has been how quickly most observers’ reaction has moved from horror at the deaths and concern about safe premises to almost equal horror at the wages involved.

It’s clear that there’s a huge gulf between the attitude to garment industry wages of most businesses operating in the industry and most people thinking about the underlying business model.

-          Practically all businesses agree that the developing world’s biggest problem is underemployment, and the job of the garment industry is to bring decent jobs. Those jobs will migrate only if workers are paid substantially less than they’d be paid in the West: but will attract workers only if they pay better than local alternatives (which are usually staying as subsistence peasants). So Nike, H&M et al promise to use only factories paying at least the national minimum wage, but attempt to cajole factory owners into productivity programmes to make sure workers actually make more.

-          Most activists reject that view. Pointing out that wages calculated that way still sound derisory to a Western ear, they argue that workers should be paid a Living Wage, and there are a number of formulae invented to calculate what that should be. The best known example is the Asia Floor Wage Campaign – which pitches for wages in South Asia not far short of those paid around the Southern Mediterranean, a few days’ drive by truck from buyers’ warehouses near Frankfurt or London  

The Asia Floor Wage campaign is run emotively, with lots of phrases describing what it is like to be poorly paid in a poor country. Discussion of the underlying principles is rare: but behind all the complications, the issue comes down to one basic question:

If Asian workers got the same wages as Romanians, why would any European buyer commission clothes from Asia? And if Romanians got the same wages as Germans, why would anyone commission clothes from Romania?

H&M don’t commission their clothes from Bangladesh out of any loyalty to Bangladesh: if clothes cost as much in Bangladesh as in Germany, they’d be getting their clothes made next door to where those clothes are going to be sold. So what does happen if you pay workers in a poor country?

That’s what the Knight’s Apparel programme at Alta Gracia helps us see.

Knight’s Apparel, a privately held company that is no. 2 in America’s $4 bn collegiate wear market to Nike, bought in 2010 a factory closed three years earlier by its Korean cap-making owners.  CEO Joseph Bozich says that when he “stopped being defensive and listened” to students buying his products, “ I heard them saying we want to and do take pride in our university and we want to buy apparel that bears the logo, but we also want to take pride in the conditions under which it has been made”

He now pays well over the Dominican minimum wage: in 2011, average monthly wages at Alta Gracia, including the 38% of wages paid into benefits programmes, averaged $759 a month, or 340% of the country’s minimum. The factory is “is run with strong employee input and relies on outside monitors to certify factory conditions”: it employs 130 people, publicity for the project claims that garments branded Alta Garcia sell at about the same prices as Nike or Adidas (which means higher than conventional private labels) and has been heavily promoted to college stores both through PR and through activist lobbying and demonstrations.

Productivity appears relatively high, but studies by Georgetown University, if their numbers are analysed any further than their topline “it’s a great idea” summary, show complicated results. After the first year, orders for Alta Gracia from the colleges lecturing the garment industry about fair wages remained disappointingly low. Knights moved some production to it from  other factories (it does not publish supplier lists, but sources from subcontractors in Bangladesh, Egypt, Greater China and around Central America), which was not subsequently sold at the relative premium Knights achieved for its Alta Gracia product – but the factory still  achieved only 80% use of available capacity.

Now, three years after the programme started, Bozich says the factory loses money, with lower profit margins on each item because of the higher wage and other costs, and low overall demand. But he remains confident.

Universities, however, call the programme successful, because shops in colleges return roughly the same amount per square foot of space allocated to Alta Gracia product as to apparel overall: Knight’s lose money on it because the colleges do not allocate enough square footage to give Knights a return, because in turn the colleges see no evidence students are interested enough in the Alta Gracia proposition to put their money where their signatures on e-petitions are. Meanwhile, Knights – bizarrely – has moved jobs out of factories in the world’s poorest countries to support the Alta Gracia experiment.

Bozich appears unfazed by his losses, and the Alta Gracia programme might reasonably be expected to see higher customer demand as a result of the current wave of scandals.  But studies so far show no convincing evidence that even in the institutions demanding “fair” as opposed to “legally mandated” wages there is enough real interest among buyers to make the programme sustainable. Nor has it shown any evidence, even in university shops actually operated by the universities, that colleges are any more prepared to sacrifice revenue to fund their football teams than real retailers are to fund their shareholders’ pensions.

I’m sceptical about campaigns like the Asian Floor Wage  – not least because such campaigns are most enthusiastically supported by people in countries (like Sri Lanka) likely to improve their competitiveness if wages elsewhere (Cambodia, say, or Burma) shot up.  And the first three years of Alta Garcia make me more sceptical.

The loudest supporters of the case that “customers would pay more for decent wages” are precisely the people shopping at the US college bookstores that sell Alta Garcia. Knight’s have ensured that there’s good promotional material around Alta Garcia product, explaining the proposition. But those customers aren’t buying – and the colleges insist on the same income from Alta Garcia space as they’d get from space devoted to Nike or Adidas.

The cost of the loss-making test is being picked up by Knight’s. Or actually by workers in Bangladesh and Egypt who’ve lost their jobs in dirt poor countries to fund an experiment in a middle-income one (income per head in the Dominican Republic is five times that in Bangladesh and twice Egypt’s).

Strip out real abuses, and most activists are peddling a theory that’s fundamentally hostile to poor people in poor countries. Paying Western wages in Bangladesh – or the Dominican Republic - is the fastest possible way to move garment production back to rich Western countries.

Now there’s no law of nature that says it has to be like that: large numbers of Western customers might become altruistic enough to go out of their way to buy clothes made in poor countries – and that’s what many believe they’re doing when they buy Fairtrade coffee. They’re quite deluded when they think that, by the way, as we review in another Blog. But the Fairtrade movement does seem to show that people will pay a premium for a product they think is more ethical: a 227 gramme packet of Tesco Fairtrade ground coffee retails for 30% more than a 227 gramme packet of Tesco ordinary ground coffee.

If someone could demonstrate that Living Wage garments sold well enough to provide their brand owners with a return, there’d be a strong case for them. If retailers – including colleges who lecture real businesses about ethics - were prepared to sell them at a loss, there might be a case for them. It might well be that activists could usefully try to persuade their peers to buy such a product.

But on the evidence available right now, Alta Garcia doesn’t support any of the activists’ claims. It’s a well-meaning experiment that’s helping 130 workers have a better life, impoverishing an unknown number of workers in poorer countries, and giving an unquantifiable number of shoppers an unsupported sense of doing good.