SAI Newsletter August 2010

SAI Interns Nathalie Herman & Dianne Milner assess whether Alta Gracia's Wage 'Experiment' should be considered a charitable move

The July 17, 2010 New York Times article, "Factory Defies Sweatshop Label, but Can It Thrive?" by Steven Greenhouse about the Alta Gracia factory in the Dominican Republic has received a significant amount of attention, as it seeks to prove that a business can thrive while paying workers a living wage. Knights Apparel has made the decision to pay its workers an estimated $500 per month, which is over three times the Dominican Republic's statutory minimum wage. The CEO of Knights Apparel, Joseph Bozich, hopes to prove that "doing good can be good business," and he is optimistic about the factory and its employees' future. Workers will clearly benefit from this wage increase, but less recognized is the potential benefit to Alta Gracia's business.

In the blog entry, "Progressive Garment Factory, or Charity?" Chris MacDonald, an associate professor at Saint Mary's University in Halifax, Canada, compared this progressive factory's decision to an act of charity: "Alta Gracia asks consumers to pay a premium so that the money can be donated to the company's workers." He argues that paying workers above the minimum wage is in some sense a voluntary effort and thus could be considered a donation, as opposed to a moral or legal obligation.

Should the Alta Gracia experiment be considered a charity? First, by definition, a charity deals with contributions from which the donors expect nothing in return. However, in regard to wages there is an exchange of labor for compensation, which a worker is fundamentally entitled to. The question of whether this case is charity or justice would become irrelevant if paying a living wage were the norm; it would simply be considered being a law-abiding business.

Second, this sort of policy-fairer sharing of revenue, is well established, and not considered a charity, in the Fair Trade system which has similar concepts. With Fair Trade certified products, consumers pay a price premium so that the producer of the good is guaranteed a decent standard of living. With Fair Trade's increasing popularity, consumers have shown they are willing to pay a higher price to ensure that workers are compensated fairly. Knights Apparel, however, will not charge a price premium, but will absorb the additional production costs, of the wage increase and not pass it on to the retailer or the consumer. "Obviously we'll have a higher cost," Mr. Bozich said, "but we're pricing the product such that we're not asking the retailer or the consumer to sacrifice in order to support it." It is realistic to expect that with an increase in wages, workers will be more satisfied with their jobs and more productive, thus producing a higher quality product. With the retail price left unchanged, consumers will actually pay the same price for a better shirt. Given consumer inclinations, there exists a market for ethically-made products- Knights Apparel and its distributers plan to cater to that market.

But this wage increase is not a charitable move, but rather, the appropriate wage that a worker should receive for his or her labor. We calculated the percentage of the cost of each shirt going to labor both before and after the wage change, as per the figures Mr. Bozich provided:

Rows 3-5 in the chart are our estimates from the public data; they suggest that each worker in the experimental Alta Gracia factory earns a larger percentage of the retail price, a percentage that better reflects the value of the hard work they put into each shirt.

Since they will not be charging consumers a premium, Knights Apparel can be expected to sell more of its products because of the increased social value of each item. The company will be able to attract consumers using ethical criteria in addition to existing customers,. The future profitability of the Alta Gracia label depends on Knights Apparel's ability to expand its current retailer base. Supported by the United Students Against Sweatshop movement, Knights Apparel seeks to maintain its position as top retailer to colleges. As stated in the Times, "Barnes & Noble plans to have Alta Gracias' T's and sweats at bookstores on 180 campuses by September 2010 and at 350 campuses this winter, while Follett, the other giant college bookstore operator, plans to sell the T's on 85 campuses this fall." With the commitments from these and other university bookstores, Knights Apparel is poised to make a larger total profit as a result of increased volume despite operating with smaller profit margins on the individual item.

It has been seen elsewhere that better treatment of workers reduces some costs-for example, if workers are more satisfied, we can expect lower staff turnover, reducing costs of hiring and training new employees. With the increase in wages, workers will also not be forced to work overtime to support themselves and their families, and they will live overall healthier lifestyles. A healthier workforce suggests that there will be lower absenteeism and a decreased likelihood of accidents on the job. These factors should lead to higher productivity, which may in partly offset the increased wage cost

The implications of this experiment for the Latin American garment industry, as a whole, are significant. As opposed to the typical "race to the bottom," in which companies become competitive by lowering labor standards compliance and wages, companies could actually compete by doing the opposite. If customers support this policy, as both Fair Trade and other research suggest they will, Alta Gracia can sustain higher operating costs in the long-term. If Knights Apparel can demonstrate consumer demand in the retail market for CSR, it could even start a much-needed "race to the top."

To view the full article, with references, click here
For more information, contact Nathalie Herman, NHerman@sa-intl.org, and Dianne Milner, DMilner@sa-intl.org.