Wages: Concerns and opportunities

 Published in: The Financial Express on September 4, 2013
Wages: Concerns and opportunities

On the evening of the second of November, almost all the channels were broadcasting a clip of Dan Mozena, the US Ambassador to Bangladesh announcing that America will not buy from Bangladesh. That was one clip and what he had meant was that the US buyers would shy away from buying products made in Bangladesh if pending labour issues are not addressed and if labour situation does not improve in the country. Apart from that, he had also expressed the hope that Bangladesh would excel in garments and beat China in no time. Yet the clip that was focused on, was the single statement of the US not wanting to buy from Bangladesh.

Very often, we pick clips or short flashes of media, which have a bigger story to tell. But thanks to Tazreen and Rana Plaza, the manufacturing community has been dominating all media: electronic and social both. Similarly, most of us also have the habit of choosing popular issues and concentrating on them. For instance, when Rana collapsed, the points that were raised had everything to do with the safety and security of the workers. But since, the safety and the security of the workers was a more complicated and time-consuming job, the first thing that the authorities did, was announce the formation of the minimum wage board. I guess, that was the most addressable bet on the table.

As a result, today, right before the next Eid, we are reading many reports of workers occupying the streets, vandalizing manufacturing units, asking for extra allowances which were not given earlier and the like. The extra demands consist of transportation allowance: (varying from Taka (Tk) 200 to Tk 400), lunch allowance (varying from Tk 650 to Tk 700/-), attendance bonus (varying from Tk 300 to Tk 500/-). And of course, they are all waiting for the minimum wage to be revised.

If these allowances are given, by a simple calculation, a factory of 1000 workers would incur additional twenty thousand US dollars (Tk 1600/-increase per worker), just to start with. This would mean, a factory producing 180,000 pieces of garments would end up increasing its costs by 11 US cents per piece anyway. The other worrying factor is that the demands of the workers are immediate as the workers are not willing to wait for the minimum wage board’s decision on the compensation package. Considering the current reality, we may very well expect serious riotous situation right before ‘Qurbani’ Eid (Eid-ul-Azha).

Let’s take a quick look at the wage structure and assess the impacts of the revision. At present, we have seven grades of workers. Let us examine 2/3 grades of wage structure to comprehend the situation better. For grade 7, the current wage of Tk 3000.00 comprises of a basic pay of Tk 2000.00, house rent of Tk 800.00 (40% of basic)and Tk 200.00 for medical allowance, along with a two hours’ general overtime of Tk 1000/-. If the minimum wage is raised to Tk 4000.00, the workers in this grade would receive Tk 1285.71 for the extra two hours of overtime (OT). Their total pay would be Tk 5285.71 per worker. If it’s raised to Tk 4500.00, then the workers take-home including general OT would be Tk 6257.14 per worker. If the ceiling were to be raised to Tk 5000.00, then the take-home would be Tk 6971.43. In a factory of 1000 workers, approximately 10% belongs to grade 7. That would mean, a factory that pays grade 7 workers Tk 400,000.00 as a total amount of wages (100x 4000/-) with an increase to Tk 4500.00 per worker, total wage in that factory of 1000 workers would go up to Tk 625714.3, causing an increase of Tk 225714.3. For grade 3, which generally has the highest number of workers, in the same factory of 1000, where 500 belong to this grade, an increase of minimum wage to Taka 4500.00 per worker would mean an aggregate increase of Tk 1167571.42, resulting in an increase of 41%.

I am sharing a chart with the readers that will clarify the different strata of the hike in minimum wage below. However the chart will focus on Tk 4500.00 and Taka 5000.00 per worker as the minimum wages and then will assess the impact:

In brief, a factory of 1000 workers that incurs a total expense of Tk 5217952.50 based on Taka 3000.00 as the minimum wage per worker, will end up paying Tk 6796492.857 with a minimum wage of Tk 4000.00 per worker, and with Tk 4500 and Tk 5000 as the minimum wage per worker will have to make aggregate payments of Tk 7536492.86/- and 8250778.57/- respectively an account of wages. This would mean with Tk 4000/- as the minimum wage, a factory would face a 30.25% wage hike; with Tk 4500/- and Tk 5000/- as the minimum wage, it would mean increases of 44.43% and 58% respectively. Out of this aggregate cost, the factory of 1000 workers, producing around 180,000 pieces of shirts/blouses every month, that accounts for wage as approximately 40% of its total cost, will ultimately raise the share of wages in total cost to 53%, 58% and 64% in case of Tk 4000, Tk 4500 and Tk 5000 respectively.

The vital questions remain unaddressed though. Can Bangladeshi manufacturers afford to pay increased wages if the buyers don’t step up and accommodate the increase? Secondly, how competitive are we going to be with increases? There is a ground reality that should be considered before we address any of these questions. Truth be told, our workers need a raise. The number to be decided on, is very sensitive, especially when the highest authority of the land herself has cautioned the manufacturers to be “rational” while determining the minimum wages. With minimum wages raised to Tk 4000/- along with the additional allowances discussed earlier, a factory will incur an additional increase of 22 US cents per piece; with Tk 4500/-, it will have to handle a 27 US cents’ extra and with Tk 5000/-, there’s an up charge of 32 US cents to be reckoned with. All these three figures bring us dangerously close to losing our competitive edge. Does that mean that the buyers should be allowed to pay the bare minimum for the rest of our lives? No. Of course, our workers deserve better.

But while we consider the ceiling of minimum wage, the industry stalwarts must also take into consideration the total bargaining power of the industry that is so dependent on buying houses. The industry, having reached a mature state, must also today take meaningful steps towards producing value added products and negotiate directly with buyers, without which, the low end suppliers remain ever vulnerable to buyers’ negotiation with the very last cent.
Come what may, Bangladesh must stay positioned to take off as the only dependable and largest apparel-producing hub in the world. In order to assure that dream, the industry leaders must ensure that smaller factories must not lose business as many of them may not be in a position to comply with the immediate raises, lest they are well backed by the price support of the brands and retailers. Last but not the least, the buyers may pledge support to improve the standards of the factories and may even offer low interest loans, but at the end of the day, there are many vendors that suffer serious stock lots and many other payment hiccups that need to be better handled by all concerned.

I believe, fairness from all ends, starting from the buyers, manufacturers, workers and civil society is essential to ensure the position of Bangladeshi garment industry in the globe. Manufacturers can’t alone bear the total burden of accountability.