The hidden risks and opportunities of supplier wage gap for brands and investors
Understanding and addressing wage gap and ensuring the correct payment of wages is the starting point for improved worker wellbeing and standards of living. It also provides brands and investors better insight into the true cost of compliance and the hidden risks or opportunities in both sourcing strategies and investor portfolios.
Ensure workers are paid correctly before progressing to living wage
Living wages and “fair” wages are a trending debate in the apparel and footwear industry. Workers and NGOs are urging brands to commit to increasing wage levels to living standards, including the cost of living as part of salary negotiations.
Despite this aspiration, many brands and factories in the apparel and footwear industry still struggle to ensure workers in their supply chain are paid correctly for the hours and overtime they work. While there are typically high levels of compliance for legal and minimum wage standards, ELEVATE data continues to suggest a gap in the correct payment of overtime and piece rate compensation.
Wages in China have improved but workers may still not be paid correctly
Wages in the China manufacturing industry have increased 150% over the last 10 yeas and wages for factory workers are now twice and four time higher than in competing markets such as Vietnam and India. Average wages are now USD 584 and range from USD 527 (toy industry) to USD 640 (furniture) depending on the sector.
Factory worker monthly take home salary
Fig 1: ELEVATE (2019). EiQ: Monthly take home salary, 2018. https://www.elevatelimited.com/services/analytics/eiq/
The trend, however, is slightly different when looking at whether workers are paid correctly. When evaluating the correct payment of wages, China’s supply chain is among the least compliant compared to other key Asian sourcing destinations. Approximately 30% of workers across industrial sectors are still unlikely to be fully compensated for all work, overtime and / or social insurance etc.
Percentage of workers incorrectly paid / underpaid
All industries, 2018
Fig 2: ELEVATE (2019). EiQ: % of workers underpaid, 2018. https://www.elevatelimited.com/services/analytics/eiq/
The apparel and footwear sectors in China are among the least compliant
Sectors such as apparel and footwear are the least compliant in terms of correct wage payments, with approximately 34% of workers underpaid by an average of 18% of their take-home salary per month. In 2018, this “wage gap” equates to approximately USD 54 per worker per month. ELEVATE data suggests that workers in apparel and footwear are twice more likely to be underpaid than workers in the electronics or toy industries.
Average monthly wage gap per worker in USD
Audited factories, 2018
Fig 3: ELEVATE (2019). EiQ: Average wage gap for province and industry in China, 2018. https://www.elevatelimited.com/services/analytics/eiq/
Percentage of workers incorrectly paid / underpaid
Fig 4: ELEVATE (2019). EiQ: % of workers underpaid by sector, 2018. https://www.elevatelimited.com/services/analytics/eiq/
ELEVATE estimates the total monthly wage gap when applied to the Chinese apparel sector in 2018 is approximately USD 275 – 300 million per month. An equivalent calculation for the apparel sector in India suggests a smaller wage gap of USD 4 to 5 million per month. Apparel Chinese workers on average have 10% of their salary foregone due to underpayment compared to 2% for Indian workers. These differences are mainly due to significant variations in overtime, working hours, wage levels and whether workers receive additional benefits such as social insurance that make calculating payments more complex. The smaller industry size in India and lower number of workers overall also lead to a lesser aggregate figure.
Addressing the wage gap is a big step towards or beyond living wage
Achieving wage compliance matters for worker well being. It is the first step to ensuring workers can afford a decent standard of living and invest in future generations. Where workers are incorrectly paid they often take on additional hours to make up the wage gap and get closer to a fair / living income.
- Apparel and footwear workers in key urban areas in China gain a base salary that is typically above the legal minimum but below the living wage as calculated by the Global Living Wage Coalition. On average, the base salary is about 22% lower than the living wage standard (see Fig 5).
- To achieve a decent standard of living these workers agree to significant overtime. On average, workers in the footwear or apparel industry in china spend 11 hours a day / 6 days a week in the factory. These extra hours mean workers in key urban areas can take home on average USD 588 per month which is +11% more than the living wage threshold.
- If the same workers were correctly paid their full monthly salary, including overtime, they would gain about USD 40 more per month. This amount is equivalent to 14 overtime hours and approximately 33% of the wedge between the base and the living salary.
Overtime is key for Chinese workers
Apparel and Footwear, 2018
Fig 5: Global Living Wage Coalition (2019) Living Wage Data https://www.globallivingwage.org/about/
ELEVATE (2019). EiQ: Overtime by sector, 2018. https://www.elevatelimited.com/services/analytics/eiq/
Brands that want to make living wage a priority should start by addressing the existing wage gap in China i.e. first ensuring that workers are paid correctly for their existing hours or piece rate and then evaluating any residual gap. In no other apparel sourcing country (not in Bangladesh, India or Vietnam) does simply addressing the existing wage gap deliver such a significant impact in bringing worker compensation standards closer to living wage levels.
Wage compliance also matters for communities and economies. As many emerging markets transition from an export-led to an internal consumption-led growth model, this wage gap represents a significant lost opportunity for local and national development plans and economic ambitions. We anticipate the progressive remedy of this gap will increasingly be in the interests of local and national governments.
Responsible and proactive remediation is in our shared best interest
It’s clear that addressing the wage gap matters for workers, communities and investors. It also matters for businesses at all levels including vendors, factories, brands and investors:
- As a brand many of the savings one believes are being achieved during the production process may in fact simply be externalized to workers. This means the true costs of production can be hidden. Recognizing, planning for, and internalizing the relevant part of this cost profile is an important and strategic discussion for responsible businesses.
- Likewise, investors that fail to recognize and understand the wage gap in supply chains may find themselves with overvalued assets and portfolios that are at risk over the medium term as this wage gap is progressively remediated and profits are impacted. Strategies that constructively engage portfolio companies and encourage transparency in disclosure are an important part of the solution.
Addressing the wage gap is arguably in our collective medium-term interest. Wage gap is likely to be remediated at some point either through direct action by brands, vendors or factories, or because of the increasing competition for workers as a result of the expanding labor demand. Any reactive or sudden increases or termination of orders will likely only worsen the ability of suppliers to pay workers their full salary. This pressure will be exacerbated where brands delay order payments or extend payment terms . Being proactive, measured and collaborative in this remediation should be an important part of our responsible business and investment agendas.
These blogs are written by ELEVATE staff members or associates and the views and opinions expressed are not necessarily those of ELEVATE.
Footnotes and sources
 ELEVATE auditors calculate wage gap according to what a worker should be paid in accordance to the minimum wage and the correct overtime premium and what they are currently paid.
 For this calculation, we are considering an overtime rate of 150% of the base hourly salary.
 In India (selected urban areas where living wage data is available) the wage gap is 2% of the difference between the living and the base salary. In Bangladesh and Vietnam (selected urban areas where living wage data is available) the wage gap is 0.2% and 2% of the difference between living wage and base salary (no overtime) respectively.
 Dickson, Marsha A. (2018). Better Buying, Purchasing Practices Index Report Fall 2018: Purchasing Practices Performance in Apparel, Footwear, and Household Textile Supply Chains. Available at www.betterbuying.org.