The Multiplier Effect: A major impediment to living wages for garment workers

Date: 02/04/2015

obst_-industryproblemsMost discussion around retail costs of living wages has centred on the idea that the living wage premium (i.e. the additional per item cost that would be paid for living wages) would be passed on to the consumer.

As explained in our post, ‘How much more would living wages cost consumers?,’ our research of selected outdoor products found that, if we assume the cost of wage increases can be transferred directly to consumers, retail prices would increase from less than one percent to 7%, depending on the product and the size of the wage increase. This is to say that consumers could cover the cost of living wages by paying several cents to less than $5 USD more for our hypothetical items, which ranged in price from $45 to $1,000.

The ‘multiplier effect’ and how it impacts retail prices

Yet these estimates for the costs of living wages – and the conventional wisdom offered by others in previous living wage discussions – do not capture real-life garment supply chains structures and practices. The fact that most garments reach the consumer by way of various supply chain actors means that a direct transfer of funds to cover increases is more complicated than it might initially seem. This compounding price escalation is what FWF refers to as the ‘Multiplier Effect’.

FWF-escalation3The Multiplier Effect essentially amounts to the practice of calculating the price paid at each step in the supply chain relative to the price quoted at the previous step. For example, a selling agent’s fee may be calculated as 24% of the FOB. So, if the pre-living wage FOB is $10, then the agent charges $2.40 for services. But if living wages bring the FOB price to $11, it means the agent’s fee increases to $2.64. No matter how big or small, an increase in wages would also spell an increase in agent fees – and, in turn, increases in prices collected by most other actors across the supply chain, including what is paid in VAT (value-added tax).

The need for an alternative pricing system

The practice of compounding price escalation is common in garment production. It is understandable: it simplifies mark-up calculations along supply chains through which thousands or even millions of products travel daily. Various supply chain actors use this approach – from agents to retailers, brands to shipping companies. In ‘Wage Increases and Factory Margins’, we discuss how factory margins are also calculated as a percentage of production costs, meaning as wages rise, factory margins are likely to be effected. The practice of compounding price escalation throughout the supply chain is a major obstacle to living wage implementation.

At FWF, we believe there is a way for different supply chain actors to earn without inadvertently inhibiting living wage implementation.

consumer_workerThe stark numbers above underscore what is perhaps most problematic about compounding price escalation: The large majority of the additional funds laid out by consumers in the name of living wages would actually get directed to others in the supply chain.

Even if a consumer were willing to pay significantly more to ensure living wages were paid, the reality is that he or she would be paying many times more than the worker receives. For example, in the case of one product we examined, the consumer would pay more than $17 USD extra for the product, with only $2.75 USD of that reaching the workers.

There are serious ethical considerations here, not to mention practical ones. Such large retail price increases would make it difficult for ‘living wage’ products to compete in the marketplace. Any strategy for wage improvements that undermines sales is not sustainable.

For this reason, exploring alternative methods for transferring living wage premiums paid by consumers to workers is one of FWF’s priorities. Watch this space for more in this regard.

There must be a better way, indeed.

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