Defending pay hike for RMG workers
Workers of Rana Plaza factories queue up to receive their salaries in Savar on May 7. Photo:Anisur Rahman
I am happy to see that the government of Bangladesh has constituted a new wage board to adjust the minimum wages in the garment export industry. This is a good move for a number of reasons; including the negative publicity the industry has received in the global media after the recent factory accidents in Savar and before that at Tazreen. This media attention has shed light on the poor safety and working conditions of these hard working workers, a majority of whom are women.
The questions faced by the board include: What should be the amount of increase in the minimum wage (at the operator or unskilled labour level)? Should this increase be applied with immediate effect form May 1 retroactive according to the government? How much of the cost increase will negatively impact on profits of local factory owners? What will be the impact on the profit of the foreign buyers? What will be the end result for the retail shoppers? Unfortunately, firm estimates are elusive in this business given many different variables at work.
Other relevant questions are: How will the raise in the minimum wage impact on the overall economy of Bangladesh? How will it impact on the welfare of the garment factory workers? What will be the expected short- and long-term impact on the garment sector and its growth and position in the global market?
It is difficult to answer these questions conclusively as many factors and many unknowns are involved. It is impossible to accurately predict the impact of exogenous factors, such as future accidents and the current very hostile coverage in the global media. So the analysis here should be taken as guess estimates, hopefully, informed estimates.
Historically, the minimum monthly wage was set at Tk 940 in 1994 for the first time, followed by a revision in 2006 at Tk 1,662.50, and most recently in 2010 at Tk 3,000. Interestingly there is no single minimum wage for the entire economy. For example, the minimum wage in general is Tk 1,500 per month for the rest of the economy, about half of whom belong to the garment sector. If the increase is confined only to the garment wages, this will create a wider gap between the garment export sector and the rest of the economy.
Within the garment industry, the minimum wage is different depending on the skills required for the job. Tk 3,000 per month is for the unskilled entry level worker. The minimum wage also varies by region, as the cost of living differs geographically. For example a garment worker in Chittagong or Savar will face a somewhat different cost of living, especially rent and transportation, compared to one in Dhaka, where the rents are much higher. Such variations in the wage are not uncommon – for example in India there are over 1,000 minimum wages across industries and regions!
As someone who has studied the Bangladesh garment exports for a number of years, I would advise the wage board to recommend an increase in the minimum wage – perhaps even doubling it from the current level. This would bring the minimum wage for the unskilled worker category to Tk 6,000 a month.
How can one compare the minimum wage in Bangladesh's garment sector with the competing countries? In US dollar and hourly terms, the new recommended wage (Tk 6,000 a month) is roughly equivalent to $0.22 per hour. Bangladesh will still be competitive in its global exports. This seems to be a reasonable short-term goal and will help bring Bangladesh garment workers at par with Vietnam ($0.23/hour) and India ($0.28/hour) and Cambodia ($0.32/hour), all three being close competitors in the global garment export business.
The current minimum wage of Tk 3,000 a month is equivalent to $.11 an hour assuming $1 equals to Tk 80. Adjusted for the month, this is roughly equivalent to a salary or income of $37.5 a month (assuming 12 hours per day, no overtime, and 26 days of work per month). If the wage is doubled to Tk 6,000 a month (roughly $0.22 per hour, or $74 per month), this will result in a 100 percent increase in labour costs (assuming productivity remains unchanged).
So, how much of this increase in labour costs will eventually pass on to the Western shoppers?
To answer the question, we have to make a number of assumptions (an art the economists learn to master). For the sake of reaching some “informed” guess estimates, let us assume that 20 percent of the final retail price of an apparel is the production cost (what is paid to factory owner plus the transportation and packaging etc). This is not too far from the real estimates we are aware of.
The markup in this business is pretty high to take account of the marketing, rental, unsold merchandise, competitive price reductions, and profit considerations by the retail giants. In our example, for a men's shirt that retails for $50 in JC Penny, the production cost may be around $10. Assuming labour costs -- cutting and stitching -- make up only 30 percent (or $3) of these production costs, the new production cost is around $13 or an increase of $3 per apparel.
To answer the question of the impact on the shopper, we have to make assumptions about how flexible the shopper is, or alternately what choices the shopper has – the term used by economists is price elasticity of demand. Let us take two extreme scenarios for the price elasticity of demand for Bangladeshi apparels by the Western shoppers.
First, let us assume the elasticity of demand is zero, which would mean that no matter the change in price the customer will still purchase the same number of (Made in Bangladesh) apparels, an extreme assumption to be sure. If true, the entire increase would be passed on to the shopper.
Second, assuming the elasticity of demand for the shopper is infinite, the other extreme end, none of increased cost can be passed on to the shopper, as she/he has many choices. If we assume the retail company -- foreign buyer -- has a fairly elastic demand for Bangladesh apparel (can go to Cambodia), the factory owner's profits will shrink by this amount.
The actual outcome is likely to be in the middle of these two extremes. That is there will be some increase in the price the shopper will pay, but not much (especially compared to the sticker price given the huge mark-ups).
Why such a large increase? Here are a number of justifications for such a move.
First, consider the political and media lens. Today Bangladesh has been shamed in the global media as a nation that exploits millions of poor women in its garment factories. The Pope, who is the leader of all Catholics, has called the current wage as fit for “slave labour.” These characterisations are not justified.
However, the industry and the nation must do something dramatic and immediate to turn this crisis into an opportunity. Now wiht the eye of the world upon Bangladesh, why not we announce in a big way that Bangladesh has learned its lessons and is firmly committed to improving the workers lives. The resulting goodwill will be greater than a billion dollar of advertisements and marketing to overcome the damage to its image.
Second, the workers will be happy with the higher incomes. This will reduce labour-management tension that has been simmering and has led to occasional violence and disruption of production and business. No one can deny that an improvement in labour-management relations will be a tremendous boast for this sector and the economy battered by political instability and the series of tragic accidents in its most important export sector. The future of garment exports and that of the nation depends on continued good relations between labour and management in this sector.
Third, this will be a move toward poverty alleviation. The higher minimum wage will impact the entire salary structure in garments and related sectors, immediately moving millions of poor hardworking women from poverty to the lower rungs of the middle class. This will reduce the existence of poverty and move Bangladesh towards meeting the Millennium Development Goals.
Fourth, the move will lead to higher productivity in the garment sector, and higher profits. Although somewhat counterintuitive, this is a realistic outcome. Better paid workers are healthier and happier. Happy workers are more productive. If you pay your workers above the market, you get the best workers and they tend to stay reducing turnover (changing jobs frequently) and helping reduce the cost of training and hiring.
Last but not the least, this will lead to innovations and improved efficiency and higher productivity. Forced to pay higher wages not just to the unskilled but to all levels of workers, the supervisors and the managers will seek ways to boast productivity. This would likely lead to better technology, greater training, reduced waste from theft, and improved processes.
All of this could more than make up for the higher labour costs; the cost per garment may actually go down if the resulting efficiencies in the long run are substantial leading to higher output per worker. This will help the entire industry move up the value chain as should be the case over time.
So my own counsel to the members of the wage board is to recommend an immediate substantial increase in the minimum wage from Tk 3,000 to Tk 6,000. This increase will take place three years after the last adjustment in 2010 when the minimum wage was increased by roughly 80 percent.
What are some of the likely intended as well as “unintended” consequences of an increase in the minimum wage in garments?
On the positive side, the incomes of the higher skilled workers who will find and retain their factory jobs will definitely increase. The increase in the minimum wage is likely to have an impact on the entire wage structure at all skill levels in garments. It may have an impact on wages in other competing sectors which employ similar labour.
For example, the income and working conditions of the people working as maids would increase as the market tightens. This is good as many of these maids are poorly compensated and work long hours.
On the negative side, the owners will argue that the higher costs will price their products out of business, as the foreign buyers will shift production to other low cost nations. This may happen in the short-run, but if the productivity gains kick in, the unit costs in Bangladesh will remain low and competitive position preserved. Other non-price factors are also important.
One can argue that raising the minimum wage too high and too soon will create disruptions in the rest of the economy. For example, the maid servants -- another major employment for younger women workers in the city -- still receive around Tk 1,000 to Tk 2,000 per month (plus room and board) and drivers of private cars receive Tk 5,000 to Tk 10,000 per month, an employment available only to men.
Certainly, a lot more maid servants will attempt to find jobs in factories, and the flow of labour from the countryside seeking such employment will also rise. The imbalance between jobs available and jobseekers may further increase. However, this is not expected to be a negative in the long-run.
What is the big picture? The problem faced by this sector with workers' safety and low standard of living should be confronted on a number of fronts –
Immediate improvement in worker's safety -- both construction and fire -- to be paid jointly by the foreign buyers and the Bangladesh Garment Manufacturers and Exporters Association, and enforced by both the government and independent inspectors.
An immediate increase in the minimum wage from Tk 3,000 to Tk 6,000 per month.
Recommendations on reaching the target of $0.50 per hour as minimum wage (or Tk 12,500 a month under the current exchange rate) by 2016.
These reforms along with a strengthening of workers' ability in collective bargaining should be pursued. The industry leaders and the labour leaders must find a mechanism to make the negotiations process less hostile; there is no reason that the management and workers cannot work in coalitions for the greater good of the business and the industry. However, the recent tragedies lead to the conclusion that workers must have a voice in decisions that involve worker safety.
As in the past, the industry leaders must respond with wisdom and with national interests in mind. Instead of their narrow interests, they should think of the future of Bangladesh. If they respond wisely, years from now when the history of the Bangladesh garment industry is written, this might be considered a pivotal move to propel the industry to the next $20 billion in business.
Munir Quddus is a professor of economics and dean of the business college at Prairie View A&M University. He can be reached at [email protected]
Comments