Fair Living Wages in the Garment Sector: The Case of Bangladesh

Today marks the fourth anniversary of the deadliest accident in the garment industry. On 24 April 2013, the collapse of the Rana Plaza Building in Savar, Dhaka, Bangladesh resulted in the death of 1,200 workers and left several thousand injured. The tragedy was linked primarily to poor health and safety practices, but it also highlighted the intense wage pressure in Bangladesh’s garment industry. This issue is becoming more pressing with disputes over minimum wages having resulted in massive social unrest in December 2016 and January 2017.

Apparel companies rely on a business model that thrived on the premise of low labor costs, but this model might be reaching its limit. Growing scrutiny of companies’ supply chains, an increased focus on reputational risk management and local unrest are factors that are challenging companies to reconsider the benefits and sustainability of paying very low wages. Shifting garment production to countries with even lower wages, like Myanmar, might be a short-term solution as similar issues are bound to emerge.

The concept of paying a ”fair living wage” has been put forward as a way of tackling this issue. Such a weekly wage would cover a person’s basic needs in terms of food, accommodation, health care, clothing, transportation, education and savings. Through this approach, apparel companies can improve workers’ lives, strengthen their supply chains and contribute to the stability of the countries they source from. Fair living wages are also aligned to several of the United Nation’s Sustainable Development Goals (SDG). The encouraging results of some industry leaders’ initiatives demonstrate the feasibility and the potential associated with a wider adoption of this practice.

Fair Living Wages in Bangladesh

Currently, garment workers in Bangladesh are paid an average monthly wage of BDT 5,300 (USD 68), which is below the national poverty line of BDT 6,336 (USD 78). During the aforementioned protests, workers demanded an increase in the minimum wage to BDT 15,000 (USD 187). However, the Minimum Wage Board, the body responsible for setting minimum wage rates, together with the Bangladesh Garment Manufacturers Export Association (BGMEA) rejected any wage modification outside the five-year review plan (2018). Moreover, 34 union leaders were reportedly arrested in an effort to intimidate workers and end protests.

The Bangladeshi garment industry accounts for 82% of the country’s overall exports. There are over 4,300 factories and the industry employees more than four million people. In 2015, 15% of GDP was reportedly generated by the Ready-Made Garment sector. Over 2015 and 2016, the industry exported 77% of its garments to Europe and the U.S.. Given the weight of the garment industry in the national economy, the implementation of fair living wages would improve the living conditions of a significant portion of the population in addition to creating some economic benefits.

While governments are responsible for setting national minimum wages, companies can incorporate a fair living wage approach in their business model.  Industry associations and NGOs, such as the FairWear Foundation, Clean Clothes Campaign and EcoAge, have worked on defining fair living wages and encouraged companies to adopt them throughout their value chain. Living wages are calculated at a country level considering the dimensions presented below and aggregated at a regional level.

Industry leaders in this area (Inditex, H&M) mapped their supply chain to ensure transparency and traceability to the factory level. These companies are engaging with suppliers to ensure that they are paying living wages to factory workers. Another avenue is for companies to support workers in their efforts to unionize and strengthen their bargaining powers. This would enable workers to take on negotiations and limit the need for direct involvement by the companies in the negotiations. Companies can also voice concerns directly through letters and meetings with the local government. Some like H&M, Inditex, C&A and Tschibo have attempted to exert pressure by boycotting the Dhaka Apparel Summit in 2017.

How Sustainalytics’ Research can Help

Sustainalytics assesses company performance on a number of social metrics, as well as the frequency and severity of controversies. This information helps investors to understand how aware and prepared companies are to manage associated supply chain related risks.

The graph below shows the relative performance of 238 apparel and retailing companies on supply chain indicators. A ”very strong” approach means that the company makes an explicit reference to living wages in requirements for suppliers. Our data indicates that 63% of companies demonstrate a limited level of preparedness, indicating ample room for improvement. Only 10% of companies currently address the question of minimum living wages explicitly. This points to a moderate level of preparedness of the sector to address related risks and therefore an area for further engagement for investors.