Sourcing garment from low labour cost countries – post significantly higher risk

Businesses with supply chains and operations in Myanmar, Bangladesh and Cambodia are benefiting from the world’s lowest labour costs – but may also be exposed to the highest risks, a new global ranking suggests.

While there’s no doubt the cost competitiveness of these labour markets is extremely attractive, it may be offset by the risks posed by poor working conditions and high levels of child labour and trafficking, according to risk analytics company Verisk Maplecroft.

Its Labour Costs Index measures a combination of wages, employment regulations, social security contributions and labour productivity to enable companies to identify and compare the cost-competitiveness of workforces in 172 countries.

China, which is ranked 64th in the Labour Costs Index, has seen costs in the labour market rise rapidly in line with the country’s phenomenal economic progress. By contrast, key sourcing destinations that are increasingly replacing Chinese manufacturers in global supply chains perform very well in the index with Myanmar (171), Bangladesh (170) and Cambodia (169) all ranked among the five lowest-cost economies.

While the work undertaken in these countries is still comparatively low value, the average wage is less than US$100 per month, compared to US$450 per month in China, according to the International Labour Organization.

Furthermore, Bangladesh does not require employers to make social security contributions, while China requires a social security contribution of 20%. Over time, this cost-competitiveness will likely attract investment that will drive development and increase productivity and wages, as with China in recent years.

Indeed, Myanmar now requires social security contributions from employers under The Social Security Law, 2012 (which came into force on 1 April 2014) and The Social Security Rules (Notification No. 41/2014). Its objective is to provide benefits covering sickness, maternity, death, employment injury, or invalidity, with a total 5% contribution of funds (3% from employer, 2% from employee) from the salary of insured workers.

However, companies also need to be alert to other risks associated with operating in or sourcing from low-cost locations.

While Myanmar, Bangladesh and Cambodia present low labour costs, each is rated as ‘extreme risk’ by Verisk Maplecroft for health and safety, working conditions, child labour and human trafficking.

Countries with low levels of socioeconomic development and inadequate environmental protections present a host of additional risks and indirect costs to business – including brand damage, investor alienation, and potential lawsuits. Additionally, extremely low wages and poor working conditions can contribute to industrial and civil unrest – particularly if workers perceive that they are not benefitting from foreign investment or rapid economic growth.

Italy and France most costly countries

Perhaps not surprisingly, the majority of the 25 highest cost countries in the index are in Western Europe – which is also identified as possessing the most expensive labour markets globally.

Consequently, high average wages, expensive severance mechanisms and high employer social security contributions combine to reduce its attractiveness as a location to employ staff. The ten most costly countries include: Italy (1), France (2), Belgium (3), Spain (4), Finland (5), Slovenia (6), Luxembourg (7), Austria (8), Iceland (9) and Greece (10).

While the European Commission has made labour market reforms a central plank of its competitiveness and employment agenda, rigid laws designed to provide a large safety net for employees in the two highest risk countries in the Labour Costs Index – Italy and France – have made them the world’s most costly locations to hire new workers.

“The true cost of business in the emerging economies is more than the direct expenses associated with the labour force,” explains Charles van Caloen, a senior analyst at Verisk Maplecroft. “It is essential for companies to understand and price in risks, such as strikes, disruptions and poor worker health, when making market entry or strategic sourcing decisions.”

Source: Just Style

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