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Study on Minimum Wage for Cambodia's Garment Industry 

CLEC - 2009-09-30



EXECUTIVE SUMMARY

PART I: BACKGROUND

Since the Cambodian Labor Law was passed in 1997, which gave authority to the Ministry of Labor to set minimum wage levels for all working sectors, the only sector with a minimum wage is the textile, garment and footwear industry (henceforth referred to as the garment industry), currently set at $50 per month. The Labor Advisory Committee (LAC) will review the minimum wage in 2010. As of date, there is no Prakas on minimum wage and no standard for determining the appropriate level.

The Community Legal Education Center (CLEC) commissioned the Cambodia Institute of Development Study (CIDS) to conduct this study in order to develop a transparent and practical framework for determining the minimum wage for Cambodia's garment industry, and to calculate the ideal minimum wage. The study will be useful for guiding future regulatory framework on minimum wage for other sectors and for drafting a Prakas on minimum wage determination. In addition, it will be useful for the LAC by providing updated data and analysis on the situation of garment workers.

This study is built upon three components: a thorough literature review of minimum wage practices in other countries; sample survey of 300 garment workers in 5 regions (Phnom Penh, Kampong Chhnang, Kandal, Sihanoukville, and Svay Rieng provinces); and focus group discussions (FGD) with 50 garment workers in the 5 areas.

PART II: DEVELOPING A FRAMEWORK FOR MINIMUM WAGE DETERMINATION

In order to have a common ground for constructive dialogue, it is necessary to define the term "minimum wage". Sometimes words such as "minimum income" and "living wage" are used interchangeably with minimum wage; however, these concepts are quite different. Minimum wage is the wage level that employers may not undercut, which is guaranteed by law. Minimum income is the income level that a citizen and their family need to live and participate in a society, regardless of their employment. Living wage is a wage that covers the basic needs of workers and their family, plus allowing for saving for future purposes.

During the period 2001-07, global real minimum wage increased by 5.7% per year; 3.8% in developed countries and 6.5% in developing countries. All of the major garment-exporting countries have minimum wage for apparel workers. In terms of purchasing power parity dollar (PPP$), which is the exchange rate that equates the price of a basket of goods and services in a specific country to that in the United States, the minimum wage is highest in Taiwan (955 PPP$) and lowest in Bangladesh (69 PPP$) in 2007. Cambodia's wage floor is 156 PPP$, which is far lower than in China 204 PPP$, but in similar range as in Indonesia (142 PPP$), and Vietnam (120 PPP$) in 2007.

While the minimum wage is a universal policy tool to alleviate poverty, there exists no universal standard for calculating the appropriate level. But as a principle, the formula should be based on the objectives and criteria.

This study develops a simple three-step process for determining the ideal minimum wage: 1) define the objectives for setting the minimum wage, 2) identify the relevant criteria or factors to include in calculating the minimum wage, and 3) develop a simple formula for calculating the appropriate level. Step 1 and step 2 should capture the real situation and aspiration of workers, and thus, should be based on surveys and focus group discussions with the target group. By this way, the ideal minimum wage, which is the result of step 3, reflects the demands of workers.

Through literature review, some common policy objectives for setting a wage floor (minimum wage) include: ensure basic needs of workers (and sometimes their dependants); provide wage protection; create incentives to work; and fair distribution of economic growth (income equality). Based on the objectives of the minimum wage, a set of criteria for setting the minimum wage is identified. Common criteria include: basic needs of workers (and sometimes their dependants); general level of wages; social security system; and economic factors, such as level of employment, unemployment and underemployment; productivity; competitiveness.

PART III: SURVEY FINDINGS

Nine out of ten interviewees are female, with average age of 24 years old. The majority is single, and plays the role of income earner in the household. Ninety-four percent of them have no more than a 9th grade education. Almost all of the workers interviewed in Phnom Penh (90%) are migrants, mostly from Prey Veng and Kampong Cham. Similarly, 67% of workers in Kandal as well as those in Sihanoukville are migrants. Those in Svay Rieng and Kampong Chhnang, however, are all locals. For garment workers, the average household size is 4 persons, 2 are income earners. Sixty percent of the 300 households earn no more than $50 per month (not including the income of the interviewee).

The 300 garment workers interviewed represents 74 factories. Most of the interviewees work in sewing, with 3 years of work experience in the industry, and 2.5 years at the current factory. Forty-nine percent are members of a trade union. On average, workers earn an effective nominal wage of $86.88 per month in the most recent month. Workers in Sihanoukville earned the highest ($90.17 per month), while those in Svay Rieng earned the lowest ($82.56 per month). Those earning higher than average income are usually piece-rate workers and/or have a lot of overtime.

Based on FGD with garment workers in 5 provinces, the general consensus is that the minimum wage is needed to 1) ensure the basic needs of workers and dependants and 2) provide wage protection. Related to the first objective, workers stated that their core mission for entering the garment sector workforce is to earn cash income for their family. If they do not earn enough to send remittances home, their parents will call them back. Thus, the minimum wage must cover not only the basic needs of workers, but also their dependants. Related to the second objective, garment workers are currently heavily dependent on overtime to cover their basic needs and that of their dependants. During times of economic downturn, like the present, and due to the stiff competitive nature of the garment industry, downward pressure on effective wage such as reductions or elimination of overtime means that workers do not earn enough to finance their basic needs and that of their dependants. To ensure that wages does not fall below an acceptable level, a legally mandated minimum wage is needed to protect the wages of workers.

In line with the two objectives, the workers interviewed demand the following two most relevant criteria for setting the minimum wage are: 1) basic needs of worker; and 2) basic needs of dependants. These two criteria must be satisfied in order to maintain labor resources in the garment industry; and hence, is critical for stabilizing and sustaining the garment industry, especially during times of economic downturn.

The basic needs of workers presented in this report refer to workers' current spending on basic needs, which may not be the level deemed physically ideal or sufficient. Among the 300 garment workers surveyed, workers spend $56.99 per month on their basic needs, of which $32.79 is food expense and $24.20 is non-food expense such as housing, transport, clothing, healthcare and etc. Among the different basic needs item, workers ranked food as their first priority, and health as the second priority, explaining that these two items are necessary to enable them to work.

We use minimum remittances required, which is the level of remittances that workers must send to their dependants or else they will be requested to return home, as a proxy for the basic needs of dependants. The minimum level of remittances represents the income shortage of the household, after taking account of other incomes, that workers are expected to help finance. According to FGD, workers must send at least $15 per month to support their dependants.

Based on the objectives and criteria identified from the survey and FGD, the formula for calculating the ideal minimum wage in Cambodia's garment industry is: Ideal Minimum Wage = Basic Needs of Workers + Basic Needs of Dependants. Using our formula, we calculate different ideal minimum wage rates based on two scenarios. Scenario 1 is based on workers' current spending on basic needs, which yields an ideal minimum wage of $71.99 per month. Scenario 2 is based on a situation in which workers' food budget is increased to the same level as the average person (from the current level of $1.06 per day to $1.15, according to the National Institute of Statistics), resulting in a minimum wage level of $74.85 per month.

Workers express that the minimum wage should be reviewed every year because of three reasons. First, workers say that their health deteriorates every year, which increases their health expense. Second, the economic situation changes unpredictably each year. Third, changes in family structure, e.g. workers get married or have a child.

To make sure that the suggested minimum wage does not create huge distortion or disruption in the economy and society, it is necessary to compare it with key indicators.
  • Poverty Line: The ideal minimum wage of $71.99 per month or $2.32 per day passes the poverty threshold, which is $0.81 in Phnom Penh, $0.68 in urban areas and $0.61 in rural areas. 
  • Average Wage: This indicator is commonly used to measure wage inequalities in the economy. The ideal minimum wage is 111% of GDP per capita in nominal terms and 115% in real terms. However, this indicator is not relevant or useful for Cambodia's case because of two reasons. First, the objective of the minimum wage is not to narrow wage inequality but to ensure that it covers the basic needs of workers and their dependants, and to provide wage protection. Second, GDP per capita ($64.37 per month in nominal terms) is not sufficient to cover the basic needs of workers and their dependants (which is $71.99 per month), and thus, fails to satisfy the objective of the policy. 
  • Value Added per Worker: Value added per worker is the performance of each worker for the factory, and represents the source of wage. Thus, it is important to look at the percentage of wage in value added per worker. There is a big and increasing gap between value added per worker and wages. During the period 2004-2006, real effective wage was 24% of real value added per worker on average; in 2007-2009, this ratio fell to 19%. Comparatively, China's ratio is 34% and Indonesia is 25% in 2008, meaning that workers there get a larger share of their performance than workers in Cambodia. 
  • Competitiveness: Even though the minimum wage in Cambodia is relatively higher than in other countries in terms of PPP$, the profit margin in Cambodia's garment industry (31%) is relatively higher than in rival countries such as India (11.8%), Indonesia (10%), Vietnam (6.5%), Nepal (4.4%) and China (the lowest at just 3.2%). Thus, uprating the minimum wage will likely not make Cambodia less competitive to rival countries or less attractive to investors. 

PART IV: CONCLUSIONS AND RECOMMENDATIONS
For Cambodia's garment industry, this study finds that:
  • Current minimum wage of $50 per month is not sufficient to cover the minimum basic needs of a worker and dependants, which are the two criteria that must be satisfied in order to effectively achieve the policy objectives of the minimum wage. Workers need at least $71.99 per month, of which $56.99 is to cover the worker's basic needs and $15 is to cover the basic needs of their dependants. Especially, workers request to have enough for food, as food is necessary to maintain their health and ability to work. 
  • There is a need to review the minimum wage annually, not only to keep wages in line with changes in the economic situation (such as inflation), but also changes in their health situation and family structure of workers. 
  • Regional minimum wages are not necessary because the total spending on basic needs is similar across region, although differences in spending structure. Thus, we would recommend a single uniform minimum wage level for the garment industry. 
  • For policy advocacy purposes, we recommend starting with the ideal minimum wage level of $71.99 per month as it reflects the current situation of workers. 
  • An increase in the minimum wage will likely not make Cambodia less competitive to rival countries or less attractive to investors because the profit margin in Cambodia is relatively higher than in countries such as Indonesia, Vietnam, Nepal and China. In contrast, a higher minimum wage could lead to higher productivity because workers feel more secured about their income. 
  • During FGD, workers request that the minimum wage setting committee include trade unions to represent their interest, and government officials to legally bind the negotiations.


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