Solving the Problem of Declining Wages

Many companies have internal audit teams that are truly dedicated to making human and labor rights a reality in their global supply chains, often by working with local civil society groups. So why are there still so many factories that do not pay the hourly minimum wage and work 60, 70 or more hours per week? The first reason is that they operate in jurisdictions where there is no culture of compliance. None of their competitors is paying the hourly minimum wage or sticking to the legal limits on working hours, so why should they? The second reason is that they can. These factories are invariably located in labor markets where there is an oversupply of labor and workers will line-up for jobs on terms and conditions below the legal minima. The third reason is that they face tremendous competition. Prices and lead-times are being constantly squeezed and the factory responds by working harder rather than smarter.

Some critics blame the multinational buyers for this situation. This is too simple an explanation. Those export factories were often not paying the minimum wage before the multinational buyer arrived on the scene and tried to implement its code of conduct and audits. Nor is this a function solely of global competition. The factories across the street supplying the domestic market in the U.S. are not respecting the labor laws either. Global competition is not helping and many foreign buyers are part of the problem, but they are not the problem.

Critics of codes of conduct have gone so far as to declare them a failure because after ten years of intense auditing, the minimum wage is still not being paid in many factories. This is like saying that the medicine is a failure because we still have illness. People get sick all the time, but we do not blame doctors for the sickness. We might criticize doctors for not treating the illness effectively enough, and particularly for not removing the root causes, but we cannot blame them for the existence of the malady. The same applies to social auditing. It is intended to take the temperature of the factory so that we can diagnose the illness and treat it. Like disease, some of the problems that social audits uncover are functions of broader social factors. Take real wages, for instance. Research shows that real wages have been declining all over the world relative to GDP, profits, and the cost of living. No single company, or even group of companies, can be held responsible for that macroeconomic condition, and no group of companies can change it on its own.

Does this mean that companies should not be trying to enforce the minimum wage in labor markets where the supply-and-demand situation does not support it? Absolutely not. Employers have a duty to respect the minimum standards set out in the law, including the minimum wage. Every buyer has a duty to find out whether its suppliers are respecting those standards, and if not, to attempt to use their leverage to get them to raise their standards. But macroeconomic trends and the business cycle can present major obstacles to achieving and maintaining the standards we would all like to see upheld, and the failure to recognize this could result in the baby being thrown out with the bath water.

Are low wages a function of the price? Would the factories pay more if the prices they received increased? The answer, unfortunately, is probably not. In many labor markets the link between wages, productivity and profits has been broken. Recent International Labour Organization (ILO) research demonstrates that the wage share has been declining relative to GDP growth, profits and cost-of-living, and the declines are steepest in the fastest growing economies. This is a highly troubling development since it means that those societies are becoming more unequal and workers are not receiving their fair share of the economic growth they contributed to. Paying higher prices to suppliers in those countries would therefore not automatically feed through to higher wages. The problem in those economies is not that there is not enough money to pay higher wages; it is that there is not enough pressure to pay higher wages. The trade unions that could pressure for higher wages are not strong enough to do so, and let’s face it, most employers are only going to pay as much as they have to. Therefore, if the workers' organizations are not able to push for higher wages should we be expecting the international buyers to do so? My answer would be yes. It is a question of doing the right thing. If a buyer sees that workers are not getting the minimum wage, this should become part of the negotiations over future orders. Buyers should take a look at productivity and see if wages have been moving in step with productivity rates. One could go even further and ask if workers are getting their fair share of the company’s profits in the form of wages. Profit rates are generally very hard to uncover since most of the factories are privately held and those numbers are kept from buyers, tax collectors and even banks, so it will be difficult for anyone to assess whether wages are moving in harmony with profits.

It may be possible to establish other indicators of growth, however, and to see how wages track in relation to those indicators. The FLA will start to do this from now on, so that we at least have the data to establish whether wages are fair. Better collection of wage data and comparisons with productivity and cost-of-living data will provide an objective framework within which we can devise remedial strategies to redress wage inequality. Simply blaming buyers and the prices they pay is too simple – it is a one-dimensional view that will not provide the context necessary to address the problem (and it is a big problem). We need concrete data as a starting point for root cause analysis that can provide the basis for remedial strategies. These strategies will take time to implement, which means we will need to set up key performance indicators to monitor progress and to provide some degree of accountability. The remediation will also need to address the sustainability issue – will the factory continue to pay at least the minimum wage and to give workers their fair share of productivity and profit growth? The best way to ensure that would be promote social dialogue within the enterprise, so that workers and employers can resolve these issues on their own. That is what we mean by sustainable compliance.

Auret van Heerden

Creating the Future of Codes of Conduct

It has become very fashionable to criticize Codes of Conduct and monitoring, and to hold them responsible for all sorts of unpleasant realities in workplace conditions – from sub-minimum wages to excessive overtime. At one level, such criticisms fail to recognize that wage and hour issues predate the wave of codes and monitoring that arose in the mid-1990s. In fact, codes were a reaction to such basic labor law violations. At a deeper level, however, the criticism fundamentally represents a misunderstanding of the nature of the Corporate Social Responsibility (CSR) movement and the limits and possibilities of code implementation. Let us remind ourselves of how we got here.

Government agencies in many, many jurisdictions around the world – from Manhattan to Mumbai – were failing to enforce their labor laws. Labor-management relations were breaking down and the coverage of collective agreements was shrinking. This breakdown in labor market regulation meant that enterprises could do pretty much as they pleased, and left with the choice, too many did the wrong thing and cut costs at the expense of workers. Civil society organizations responded to these regulatory failures and consequent abuses with the only weapon they had – information. Using the Internet, they mobilized public opinion nationally and internationally in order to pressure companies into doing the right thing. Multinational brand names were obviously the most sensitive to such public exposure, and so a new form of regulation emerged in which civil society organizations use information to oblige brands to enforce labor standards at their supplier facilities. Thus, private actors stepped in to replace public agencies. These ad hoc responses obviously needed to be more consistent and global, and consequently codes of conduct were adopted and implemented worldwide and enforced through audits.

The phenomenon of private actors (like companies or NGOs) delivering public goods throws up a number of anomalies. For starters, they are not mandated or elected or accountable in the same way that public agencies are. Private actors therefore lack legitimacy when they step in to replace public actors. In order to compensate for this, the best initiatives were convened by governments and included other stakeholders. This led to the so-called Multi-Stakeholder Initiatives (MSIs), which grouped multinationals, civil society organizations and sometimes even government agencies together to drive labor standards down the supply chain. In addition, the Fair Labor Association (FLA) has universities at the table and has included suppliers in order to get as many stakeholders involved as possible. Corporations cannot achieve full social responsibility without accountability, and so the FLA went even further and made audit results public, transparency being the best form of accountability.

This effort grew in scale and scope throughout the 1990s and by the end of the decade, social audits had become a standard feature in apparel and footwear factories exporting to the US and the EU. They shone a light into tens of thousands of factories that had not been inspected for a long time. Did they always do a good job? Categorically not. There are thousands of cookie-cutter audits that cannot be considered real audits. Many buyers do not follow-up to make sure that noncompliance issues get resolved. Some buyers simply cut and run when auditors report major problems with a supplier facility. Still, there are a good number of solid audits conducted by serious companies who want to ensure that labor standards are maintained, even if only to reduce the risk of scandal.

What then is the future of codes? If we return to the point made earlier that codes are required to compensate for the regulatory breakdown in global supply chains, then they will be around for a long time. Many of the main exporting countries will remain badly regulated, and some will get worse. Multinational companies and buyers will therefore need to take extra steps to ensure that their product is manufactured under ethical conditions. The apparel and footwear sector has been a pioneer in this regard, but there are other sectors which are way behind the curve in terms of the due diligence they should be conducting.

More companies in more industries will adopt codes and monitor their implementation in order to control for the sorts of risks we have seen well-publicized in the last 12 months, risks such as serious health and safety violations and child labor. Hopefully, these other sectors will learn the lessons of the apparel and footwear sector, and will adopt the latest techniques of root cause analysis and capacity building. Code monitoring will not only have to get a lot better, it will also have to avoid duplicate auditing and achieve greater harmony in terms of standards and benchmarks.

Finally, it will be vital that we achieve synergies and consistency in terms of remedial strategies. Too many remedies are superficial and short-lived, and too many buyers are reaching the same compliance findings in the same factories and requiring those factories to make changes. If the factory is lucky, the companies will prescribe the same remedies, but often they don’t, and this results in the factory looking for the simplest way to give them what they want, regardless of the integrity or the sustainability of that change.

Greater coordination between buyers will be necessary if we are to break out of this vicious circle. Therefore, the future of codes is many futures. Some will be seriously implemented and seriously received and will achieve real gains for workers' rights and working conditions. Others will be mere charades and treated as such by suppliers. Consumers, investors and civil society will need to make some judgment calls and start rewarding those companies sincerely trying to defend rights by buying their products and shunning the products of the pretenders.

Auret van Heerden