Productivity improvements can often easily wipe out the cost of higher wages

Productivity improvements can often easily wipe out the cost of higher wages

19th century Luddites had no way of knowing that mechanisation would ultimately lead to better productivity. But today's apparel factory owners have no excuse for failing to grasp that productivity improvements can often offset the cost of higher wages, writes Mike Flanagan.

March 2011 marked the 200th anniversary of the Luddites, a group of garment workers around England's Nottingham area now famous for their apparently pointless campaign against new garment technology.

Most people these days think you can't stop progress: mechanising textile and garment making was inevitable, and in early 19th century England the process was ultimately responsible for the modern industrialised world.

But as is so often the case, popular beliefs can be wrong. Although they've got a peculiar relevance to garment making today.

What actually happened was that in the early years of the 19th century, Britain was at war with France. Both sides tried to starve the other by blockading trade - which led to serious financial problems for Britain's garment exporters. Their solution was to squeeze their workers (the only cost over which they had any control) and to mechanise.

The workers, in many cases close to starvation, asked for government help, especially in preventing their wages from being lowered. The government refused since, in the words of the then Prime Minster, "the Legislature ought not to interfere, but should leave everything to find its own level".

Rich, really, considering the problems stemmed from that very government's banning of free trade. But whatever the rights and wrongs, the workers decided knitting machines threatened their livelihoods, and in March 1811 started to smash hosiery knitting machines belonging to owners who'd cut wages.

And, of course, the Luddites in one sense were right and their opponents wrong. New knitting machines did mean drastically lower wages, and most early 19th century hosiery knitters were turned to near-destitution.

A generation later, widespread mechanisation made Britain richer, but the Luddites' prediction that hosiery knitters would be badly damaged for the next couple of decades was proved totally accurate.

Government interference in garment wages
History rarely repeats itself. Two hundred years later, unlike the British in 1811, most governments throughout the world just love interfering in how garment wages are set.

Today we've got the New Luddites: evenly split between business owners protesting that this interference is about to destroy their livelihoods and union activists who seem not to have noticed what motivates governments these days.

Most extremely, the Federation of Hong Kong Industries (FHKI) forecast that one in three Hong Kong-owned factories in China - or 22,000 of the estimated 65,000 plants - will be forced to cut back their operations or go under in the next three to five years as a result of more stringent labour rules, labour shortages, rising wages, an appreciating yuan and high raw material prices.

Mind you in 2008, the FKHI predicted thousands of Pearl River factories would close as wage rises got out of control, and three years later, we're still waiting.

The FKHI is making the original Luddites look like brilliantly perceptive forecasters: after minimum wage rises around 20% throughout China in 2010 - and far more than that in Guangdong and Shanghai - China's share of the world garment trade in 2010 was the highest ever.

Indeed, many modern factory owners' downright awful grasp of what's going on really ought to make us think again about those nineteenth-century Luddites.

In early 2010, Bangladeshi garment makers swore they couldn't possibly afford to increase wages. After intense pressure from buyers and from the government, they were forced to increase minimum wages by 80% from November - and just can't keep up with growing demand from buyers.

In March this year, the Honduran Manufacturers Association complained that unrealistic increases in minimum wages had been driving Honduran garment businesses to neighbouring Nicaragua and El Salvador (where wages are lower) since 2009. But during 2010, those "unrealistic" wages helped Honduras increase its share of US garment imports over 2009, while "realistic" wages in Nicaragua caused its share to fall.

And at least the Luddites of 1811 kept one consistent message.

In February, Guatemala's garment industry was expected to lose 6,000 jobs in 2011 as a result of a government decision to increase minimum wages by 14.8%. Two weeks later, the Guatemalan government was forced to intervene again, as it realised the US might be forced to suspend Guatemala's trade concessions if trade union rights were not more scrupulously enforced. Another week later, and Central American boosters were claiming that the region's "market proximity now makes it more competitive to make clothes there than in China".

On the other side of the world, as Thai factory owners blame their government's similarly unrealistic wage rises for factories moving to Vietnam, Hong Kong's Top Form is favourably comparing its Thai operations to the business climate in China, where "landslide changes" in employment laws are "too rapid to comprehend and react to."

So are apparel business owners today's real Luddites?
Well they'd have to go some way to beat the Asia Floor Wage Campaign, whose "People's Tribunal" in Sri Lanka at the end of March announced Asian governments "should...work together in a regional approach to prevent a race to the bottom by global industries seeking the lowest costs".

This "race to the bottom" has been the mantra among the more blinkered trade unionists for the past five years. During which time, governments from Guangdong to Guatemala have been actively pushing wages up.

Actually: there's a huge difference between the original Luddites and today's New Luddites.

Nineteenth century Luddite workers, like modern factory owners, were concerned with their own well-being, not the greater good of society. They turned out to be correct in forecasting that mechanisation would destroy their jobs for years to come.

Their 21st century near-clone owners, though, have spent the past two years having their screams of imminent catastrophe proved spectacularly wrong. Just as this "race to the bottom" is no more than a fantasy sport.

Why? Ultimately: productivity.

19th century Luddites had no way of knowing mechanisation would ultimately transform the world's productivity and bring unbelievable wealth to most of the population.

But modern factory owners have no excuse for failing to grasp that productivity improvements can often easily wipe out the cost penalties of higher wages - and union propagandists still churning out this absurd myth of a "race to the bottom" don't help either.

Economics consultancy Dragonomics estimates garment output per worker in China has grown 13% a year since 2005 - meaning that even with generous wage rises, China's labour costs per sweater or shirt overall are about the same as five years ago.

If Central American claims of returning orders materialise, it'll be because the overall effect of the shorter lead times, lower transport costs and smaller inventories possible when making close to US customers will make sourcing in the Americas cheaper, overall, than sourcing in Asia.

Increasing wages doesn't automatically mean productivity improves too. 2010 wage rises in the Delhi area, for example, don't seem to have helped make the Indian garment industry's output per worker get any better.

19th century Luddites can be forgiven for not anticipating the effect of better productivity. The market, though, won't forgive head-in-the-sand New Luddites, whether they're showing a knee-jerk opposition to higher wages, or still believing outdated propaganda slogans.

They'll just be dismissed as people unable to adapt to the modern world. While their customers take their business to factories who understand how the world works in the 21st century.