After an ongoing battle for better pay, the Cambodian government agreed in November to increase the monthly minimum wage to $128 from $100, and the new rate took effect Thursday, Jan. 1.
In a statement released Thursday, the International Labour Organization (ILO) called on global brands and buyers to play a part in absorbing the higher pay as the increase is expected to raise factory owners’ costs by nearly 20 percent, while their margins continue to shrink.
Roughly half a million workers in Cambodia’s garment and footwear industries will benefit from the increase, and average wages—which includes bonuses and overtime—are likely to rise from $183 to $217 per month according to estimates from the ILO’s country office for Thailand, Cambodia and Laos.
As a result, factories’ wage bills are expected to jump 18.7%. The increase comes on top of rate adjustments that have more than doubled the 2012 minimum wage of $61. And at the same time, the prices paid to Cambodian factories have been flat or declining. According to the ILO statement, the U.S. Bureau of Labor Statistics has calculated that prices for apparel imports from Association of Southeast Asian Nations (ASEAN) countries have fallen by 4.5% since June 2012.
“Caught between these two forces, factories have seen a substantial fall in their operating margins over the past three years,” Malte Luebker, ILO senior regional wage specialist said. “In principle, factories can respond by increasing efficiency, using measures that range from better work organization to energy conservation. However, our research shows that these gains are gradual and will only enable factories to cover a small share of the expected wage increase.”
So, if Cambodia’s garment sector is to remain economically viable, all sides will have to work together, Maurizio Bussi, the ILO’s Country Director for Thailand, Cambodia and Lao PDR said. “We call on the global brands to play their part. We have received encouraging signals that key buyers will honour the pledge they gave the Cambodian Government in September, and will reflect the new minimum wage in higher FOB prices for 2015,” he added.
Eight leading global brands agreed in September to pay higher priced for produce made in Cambodia to ensure garment workers earn a fair living wage.
In a September letter to Cambodia’s government, Inditex, H&M, C&A, Primark, Next Retail, New Look, N Brown Group and German Tchibo, wrote, “As responsible Business’ our purchasing practices will enable the payment of a fair living wage and increased wages will be reflected in our FOB prices, taking also into account productivity and efficiency gains and the development of the skills of workers, carried out in cooperation with unions at workplace level.”
According to ILO estimates, global brands would need to increase the prices paid to factories by 2.4% to 3 percent in order to cover the shortfall, provided that other costs remain the same. This increase would add roughly $0.02 to the price of a T-shirt that currently costs $0.80 cents to make, and that might retail for as much as $10. On annual garment and footwear exports worth $6 billion, the increase could generate additional revenue of $160 million to support the new wage levels.
“Following an optimistic scenario labor productivity in the garment sector could grow by roughly 4 per cent in 2015, its trend growth rate since 2000. This would enable factories to raise [average] wages by US$7, to US$190, without further eroding their margins. The expected increase in average wages – to $217 per month – is much higher than what companies can generate through efficiency gains,” the ILO noted.