How much more would living wages cost consumers? What FWF’s research shows us

Date: 30/03/2015

Consumers want products made by people who are treated fairly and receive a wage they can live on.

As FWFobst_cost’s Associate Director Sophie Koers explains: ‘Various marketing studies and consumer surveys indicate that a significant number of consumers will pay a premium to buy clothes that are made fairly. We know the demand is there. Our focus now is on building solid models for delivering living wages to reliably meet that demand.’

Increasingly FWF experiences that garment brands are heeding their consumers’ demands. Some FWF brands are keen to be leaders on this topic.

And yet they have a fair question to ask in the process: How much more are we going to have to ask customers to pay for this?

‘Everything else remaining equal…’

Interestingly, FWF’s work on this issue indicates that – everything else remaining equal (a pivotal assumption to make here, which we will return to below) – the impact for retail price is not large. For instance, in our 2011 study with Fair Trade International, we found that the retail price of a fair trade t-shirt would go from €29.00 to €29.27.

Similarly, in our research with European Outdoor Group pricing the impact of living wages on backpacks and jackets, we found that retail prices would only increase from less than one percent to 7%. This is to say that consumers could cover the cost of living wages by paying several cents to less than $5 USD more for the products we tested, which ranged in price from $45 to $1,000.

Few of us would refuse to pay these small increases in retail price if we knew we were investing in fair treatment of the people who make the garments we wear and use.

And yet FWF’s research has led to a critical discovery with regard to consumer pricing, which has major implications for living wage implementation in supply chains.

In our research on the fair trade t-shirt, we found the impact of wage increases on retail price would actually be much higher. The €0.27 increase in salary costs would have translated to a €1.57 increase for consumers. That is, a wage increase that represents less than 1% of the original retail price would actually cost the consumer more than 5%.

Climbing the Ladder FinalSimilarly, in the jackets and backpacks we studied, we saw retail prices increasing by as much as 15%, instead of a maximum of 7% in our modelling where ‘everything else remains equal’. So, in the case of one jacket, we predicted consumers would pay $9 USD more after wage increases, even though living wages only involved a per product increase of $1.40 USD.

Obviously, everything else does not remain equal when wages increase.

Why the jump in retail prices after living wages?

These significant increases at the retail level are caused by what FWF has dubbed ‘compounding price escalation’ – or, more simply: ‘the multiplier effect.’

The multiplier effect occurs when the price paid at each step is calculated relative to the price quoted at the previous step. For example, in the pricing data provided to FWF for a t-shirt made in India, the selling agent’s fee is calculated as 24% of the FOB price paid. So if FOB increases with the payment of living wages, so does the agent’s fee.

While on its face, this seems to offer a quick and simple way to calculate payment in long a complex supply chains, it has real potential to make wage raises more costly than they needs to be. Particularly in long supply chains, the cost of increases to wages can be seriously inflated by the time they are passed along to the consumer.

As FWF’s Margreet Vrieling explains, ‘All of us need to rethink these pricing mechanisms. Both with a view to ethics and good business, there has to be a better way.’

Read more about ‘the multiplier effect’.

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