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Can an Apparel Factory Pay Living Wages and be Competitive? New Georgetown Research Says Yes

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In 2010, an apparel brand called Alta Gracia commenced operations with a unique business model. Workers at the company’s factory in the Dominican Republic earn a living wage that is more than three times the legal minimum. The factory was designed with their safety and health in mind. The workers are organized in self-managed teams. Management supports their rights to organize and bargain collectively. All of this takes place under the watchful eyes of a worker rights organization that certifies the factory’s compliance. 

For the workers of Alta Gracia, the last four years have been nothing short of transformative. People that struggled to obtain the bare necessities of life are eating well, living in decent homes, sending their children to schools and universities, and even helping to fund small businesses. The contrast with the sweatshop model of apparel production could not be more striking. 

But is this a viable business model? Can Alta Gracia prosper under the burden of its higher costs? Georgetown professors Ed Soule and John Kline are optimistic that it can. Their research indicates the operation will breakeven during 2014 and will be profitable in 2015.

“Alta Gracia is the only garment factory in the world that treats its workers with this level of respect and dignity,” said Ed Soule, associate professor of ethics at Georgetown University’s McDonough School of Business. “This is a viable business model and a realistic alternative to the inhumane sweatshops that are all too common in the apparel industry.”

In the recent report, “Alta Gracia: Four Years and Counting,” Soule and co-author John Kline, Georgetown professor of international business diplomacy, evaluate how Alta Gracia is setting an example of new standards for garment factories around the world. Its success offers a number of lessons for the apparel industry, and challenge long held industry myths – from paying low wages in order to be a profitable business, to wage correlation with consumer prices and the effectiveness of current factory monitoring systems.

Myth: Factories Must Pay Low Wages to be Profitable

Alta Gracia provides a test case for defining, implementing and sustaining a living wage in apparel factories. It believes in the concept of “salario digno” or “wage with dignity.” This has resulted in both pay that meets workers’ basic needs and respect for workers as valued partners. In addition to wages, workers will share in annual profits through a bonus system negotiated in a collective bargaining agreement. The most productive workers will receive a bonus, which provides an incentive mechanism for the company and extra income for the workers.

In turn, workers are committed to the factory’s success and yield higher productivity, better quality control and increased retention. In fact, Alta Gracia’s turnover is one-tenth of the industry average. This results in productivity gains and cost savings that help to off-set the higher wages. After four years of operating with a living wage business model, the company will produce $16 million of retail sales in 2014.

Myth: Higher Labor Costs will Increase the Cost of the Product to Consumers

Labor costs are generally acknowledged to represent a small portion (2-6 percent) of the retail price of most garments. Less well known are the impacts of mark-up practices as apparel moves from producers to consumers. Kline and Soule’s research indicates that a living wage would not significantly affect consumer prices unless wholesalers, apparel brands and retailers tack additional profits onto the minor labor cost increase.

Myth: Effective Monitoring Systems are Already in Place

The system widely used to monitor factory compliance with labor codes of conduct is broken. There are too many violations with too slow and/or incomplete remediation. Kline and Soule’s study analyzed reports on the industry’s current compliance with labor codes and found that as many as 24,000 substantive violations may occur each year at contracted apparel factories around the world, despite long-established monitoring procedures. Even where attempts are made to correct violations, they found that 25 percent of the violations remain unaddressed and another 25 percent are only partially corrected two to three years after remedial action was promised.

Alta Gracia represents a superior form of oversight. Alta Gracia’s unusually high labor code standards are monitored and verified by the independent Worker Rights Consortium (WRC) as well as the local workers union.  This cooperative approach is critical to the factory’s success; everyone is working on the same side. Rather than reacting to abusive labor practices, Alta Gracia proactively protects labor rights and brand integrity.

Soule and Kline’s research challenges the myths that have sustained unfair labor practices for decades, showing how a business model centered on living wages and social responsibility can be a realistic alternative to sweat shops.

“Our research on Alta Gracia’s success harmonizes well with the values at Georgetown University and the belief in principled leadership,” said Soule.