Wage increases and factory margins

Date: 01/04/2015

factory small FWF maintains that there are structurally-integrated practices in the garment industry that will need to be addressed if there is any hope of making living wage implementation scalable. One such practice pertains to the way factories calculate factory margins.

An excerpt from FWF’s publication, Living Wage Engineering (2014):

When we plugged the new ‘living wage’ staff costs into the costing models we developed based on the real-life costing sheets provided by factories, we noted that in most cases an increase in staff costs would lead to an increase in factory margins. In other words, if the same models were used in a case where living wages were paid, the factory would also earn more.

While such increases were relatively small (e.g. 2 to 15 percent), the impact was real for FOB. This extra factory margin meant brands were paying an additional 1% to 2% in FOB – above and beyond the cost of wage increases – just for trying to uphold their FWF commitments.

This is not a negligible cost for a company, particularly if it is producing hundreds or thousands of units of a product.

This study proved valuable for flagging what appears to be a fairly common practice among garment factories (i.e. across various garment industries). FWF’s ongoing wage work will need to explore the practice further and identify ways for brands to avoid incurring additional costs by doing the right thing.

For FWF, this practice at the factory level is similar to, and a part of, the ‘multiplier effect’ in the supply chain. ‘In today’s garment supply chains, it is perfectly reasonable for a factory to calculate margins in relation to production costs,’ explains FWF’s Ruth Vermeulen. ‘But if we hope to make living wages scalable, this practice must be addressed.’

FWF is working with its partners to find approaches to living wage implementation that do not in the process lead to gains for other supply chain actors – including factory management.

Have any clever ideas for a way around this practice? Please share your thoughts with us.

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