Identifying ways to cover the cost of wage increases

Date: 01/04/2015

obst_costFWF’s research on costs for brands and consumers and development of costing sheets and other tools represent real strides in helping brands and factories answer the critical question: How much more do wages costs?

It is also important to gauge the corollary costs of living wage implementation. In addition to increased production costs, what changes, if any, will there be to monitoring fees or taxes and duties? Or where training is required (e.g. through FWF’s Workplace Education Programme), how much does that cost?

Experimentation by FWF members and through FWF pilot projects will help answer these questions. And we are committed to finding supply chain pricing methods alternative to ‘compounding price escalation’.

But there are also other ways we can explore covering living wage costs.

‘In most production countries, any discussion of wage and price increase needs to start with an evaluation of productivity,’ explains FWF’s Margreet Vrieling. ‘In many garment facilities, productivity is lagging.’ There are real gains that can be made by addressing factors such as the physical layout of the workplace, human resource management, and payment schemes.

(FWF’s Macedonia project focuses on questions of productivity, with links to wage increases. Watch this space for reporting on project outcomes in the future.)

Efforts to raise wages above the minimum wage and towards living wages can also be funded through efficiency gains in the supply chain. Some companies have moved to work directly with factories, cutting out commissions paid to agents or other middle men. It is also worth exploring how costs might be absorbed into profit – either at the level of the factory, the brand, or both.

On profits, FWF seeks to explore how slight cuts to unit profit can be offset by gains through bigger order volumes or recognition in the market as an ethical brand.

But so far, FWF’s work on pricing living wages has focused at the level of the product. For our future work, we hope to work with brands to think more strategically about covering the costs of living wages in new ways.

As FWF’s Martin Curley explains, ‘Brands think and evaluate costs and revenue in terms of entire collections, not individual products.’ Product pricing and margins can vary considerably among garments in a collection for a variety of commercial reasons (e.g. a collection may include a low margin item that creates a lot of publicity for the entire collection).

Curley is calling on brands to apply this approach to living wage costing. ‘Can we calculate the total cost of living wage payments for an entire collection?’ If so, brands have the opportunity to think strategically about covering the cost of living wages. Accordingly to Curley, ‘retail prices on some products may be able to bear increases. Others might not.’

Product cost is not the only cost of doing business for brands. All brands must pay for some mix of product, marketing, advertising, design, and, in some cases, retail operations, rent, etc. All brands construct margins on their product accordingly. If brands do not want to increase prices, there may be possibilities to adjust other expenditures to support living wages.

‘My hunch is that any sustainable increase to wages will require a range of tactics – from productivity through consumer premiums…,’ says Vrieling. ‘Each case is different. We just need to develop a range of tools to include in the living wages toolbox.’

Adapted from FWF’s reports Climbing the Ladder to Living Wages (2012) and Living Wage Engineering (2014).

Comments are closed.