Research Findings

Global supply chain factories improve working conditions more when they are unionized, certified, and avoid piece-rate pay

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December 4, 2019

Suppliers to global value chains face formidable efficiency demands to produce ever more cheaply and rapidly. Suppliers in the Global South often compete on labor costs and operate with very low margins, and multinational companies’ (MNCs) demanding sourcing practices magnify these efficiency pressures. This can lead to a “race to the bottom” in labor practices, resulting in sweatshop conditions.

Suppliers to global value chains face formidable efficiency demands to produce ever more cheaply and rapidly. Suppliers in the Global South often compete on labor costs and operate with very low margins, and multinational companies’ (MNCs) demanding sourcing practices magnify these efficiency pressures. This can lead to a “race to the bottom” in labor practices, resulting in sweatshop conditions.

On the other hand, suppliers also face increasingly forceful legitimacy demands to improve workplace conditions. Rampant labor abuses and workplace catastrophes have attracted worldwide attention to hazardous working conditions in supply chain factories, spawning private political activism and increasing reputational pressure on global brands to improve them.

Such pressure has led MNCs to develop supplier codes of conduct and to push their suppliers to implement them at their factories. Codes of conduct are contractual provisions that set forth standards governing working conditions like wages, hours, child labor, discrimination, and occupational health and safety, typically based on the core labor standards articulated by the International Labor Organization.

Although MNCs require suppliers to agree to adhere to these labor codes as a condition of doing business, MNC behaviors betray ambivalence about whether they want suppliers to rigorously implement code provisions. For instance, although labor codes require supplier factories to cap working hours, many buyers continue to make sourcing demands that are nearly impossible to meet without excessive overtime.

Under these multiple, intense, and potentially conflicting external pressures, are supplier factories actually improving their labor practices to conform to these labor codes? If so, why do some improve more than others?

In a recent article published in Organization Science, we provide systematic evidence of how the presence of particular internal structures is affecting the extent to which supplier factories’ labor practices are aligning—or being coupled—with their formal commitments to adhere to labor codes. While many scholars have associated the improvement of labor practices with external pressures exerted by state power and civil society mobilization, there is a paucity of research on the association between such improvement and suppliers factories’ internal organizational structure.

We analyze a proprietary dataset from a large social auditing firm. Audit teams assess the extent to which factories’ workplace conditions meet a single code of conduct that specifies maximum working hours and minimum wages, occupational health and safety practices, and environmental management practices. Each audit results in a summary score that ranges from 0 to 100, with higher scores indicating that labor practices better adhere to the code.

We examine a supplier factory’s labor practice improvement as the difference in its score between its prior and focal audits that were conducted from 2012 through 2015. We analyze 4,887 observations (each reflecting data from the focal and prior audits) of 3,276 supplier factories in 55 countries on behalf of 102 buyers from 11 countries. 76% of the audited factories are in China; the rest are elsewhere in Asia, Europe, and the Americas.

We find that labor practice improvements vary substantially across supplier factories, averaging 8% (6 points) and ranging from -78% to 85% (–62 to 67 points). Our analyses highlight three important internal structures that are associated with greater improvement in labor practices: payment incentives, certifications to management standards (e.g., SA8000, WRAP, ISO 9001, or OHSAS 18001), and unions.  

Factories that avoided the high-powered productivity incentive of piece-rate pay improved their audit score in successive audits 55% more than factories that used piece-rate payment.  Piece-rate payment structures the actions of both managers and workers in ways that are likely to favor short-term labor productivity at the expense of activities that improve labor practices. For example, managers at piece-rate supplier factories might be less likely to invest resources to improve labor practices if they undermine short-term productivity goals, and workers being paid a piece-rate might similarly be more reluctant to adopt operational practices—such as wearing personal protection equipment such as masks and steel-mesh gloves, or using machine guards—that would improve compliance with labor standards but risk reducing productivity.

Supplier factories certified to management system standards improved by an average of 17% more than noncertified factories.  Procedures like internal auditing and corrective action plans are at the heart of most certified management system standards. These procedures can promote improvement in working conditions by revealing flawed core production processes, such as the inappropriate labeling and storage of hazardous chemicals or semi- finished products, and by facilitating corrective actions to remedy these problems in ways that mitigate workplace injury risks.

Unionized supplier factories improved 20% more than nonunionized ones. Unions can play an effective communication role, facilitating dialogue between managers and workers to identify risks and work together to address them. Many workplace hazards would not be known to managers absent communication with affected workers; in many factories, unions also communicate information about new occupational health and safety procedures to workers.

We also find important interactions among these three internal structures. Piece-rate payment tempers labor practice improvement associated with certifications and unions. Specifically, certified factories are associated with less improvement in piece-rate-paid factories than in factories not using piece-rate payment. Worker’s unions are also associated with less improvement in piece-paid factories than in factories not using piece-rate payment.

In addition, certifications and unions complement each other. Workers’ unions are associated with greater labor practice improvement in certified factories than in not-certified factories. Likewise, certification is also associated with greater improvement in unionized factories than in nonunionized factories.

Implications

Our study calls more attention to the internal structures of supplier factories and their relationship to improvements in working conditions. We show that even in the challenging institutional environments of emerging economies—where labor regulatory institutions are weak and efficiency demands are strong—some internal structures, such as certification and unions, are associated with greater improvement of labor practices, and can attenuate the negative association between compliance improvement and high-powered productivity incentives like piece-rate payment.

Our research also suggests important strategic considerations for managers selecting suppliers and provides key insights for the design of transnational sustainability governance regimes. For example, MNCs should expect suppliers that have managerial structures like management system certifications and channels for worker participation to improve their labor conditions more rapidly and, conversely, should expect those using piece-rate systems to improve more slowly. This should inform sourcing strategies, both in terms of selecting suppliers and decisions about how intensively to monitor them.

Read more

Yanhua Bird, Jodi L. Short, and Michael W. Toffel.”Coupling labor codes of conduct and supplier labor practices: The role of internal structural conditions.” Organization Science 2019

Image: ILO Asia-Pacific via Flickr (CC BY-NC-ND 2.0)

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