Understanding the Global Labor Market

June 2013 • Lockton Companies

L O C K T O N C O M P A N I E S

NADINE MOORESenior Vice President

Producer312.669.6701

nmoore@lockton.com

On April 24, a garment factory in Bangladesh collapsed,

killing more than 1,000 people. This is believed to be

the largest tragedy in the garment sector. This incident

highlights the risks workers and companies face in the

global supply chain. Combine incidents like this with a

“new normal” in both our national and worldwide economy,

and the global labor market can be intimidating. This white

paper will review global labor issues in the context of these

new economic realities. We will review the continuum of

labor markets from west moving east and provide some

insights into trends and areas to watch for risk and human

resources managers.

The United States and Europe have perhaps the most mature and regulated labor markets. Each region has well documented laws to protect against the exploitation and discrimination of workers. However, even with mature laws and support systems via unions and government labor agencies, a shift in the workplace is underway.

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United States

In the U.S., this shift is characterized by three events: the Chicago Teacher’s Union Strike, the bankruptcy of Hostess Brands and the passage of a right to work law in the state of Michigan.

On the face of it, these three issues are very different. Schoolteachers are government employees, Hostess had cash flow issues and labor laws are all very different. There is an underlying theme in all of them: the growth of an economy (or underlying system/city) is driving work issues. In the case of Chicago, the state and city governments have severe budget issues and debt issues. Furthermore, there is a shift in the number of children in the city, and the revenue base from businesses is static at best, in some areas shrinking. When the teachers went on strike, the city conceded to the union’s demands in what was a perfectly planned union strike. Months later,

the economic reality of population change and city finances has prompted the city to announce it will be closing a large number of schools and consolidating. For Hostess, bankruptcy came as a result of labor issues and payroll cost. The state of Michigan passing a right-to-work law in perhaps one of the most unionized populations in the U.S. was particularly interesting. The common theme of these events is financial; pressures on budgets across public and private entities are directly impacting the labor environment for workers.

So how do these issues impact your insurance? Disruptions in the labor market in the U.S. increase risk and costs to your claims ratios as well as your overall costs. Payroll is a fundamental driver of insurance premiums. Insurance companies are reviewing their

portfolios of business and, in some cases, trying to exit lines (workers’ compensation). Additionally, for organizations that are still struggling to recover from the recession, there is little room to maneuver financially. Risk managers should look at all aspects of their U.S. insurance program and consider making changes to broaden coverage in certain areas like credit insurance.

Europe

Moving east to Europe, the role of the labor union is even more powerful. France perhaps has the best examples of union strength impacting the viability of an entity. Peugeot, the French automaker, needs to restructure to survive, and to do so, it needs to close plants. It finally achieved government approval to close plants and make widespread reductions in force. The unions continue to vow to fight. The bottom line is Peugeot cannot survive without these cuts; the French

June 2013 • Lockton Companies

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government has finally acknowledged the closures are necessary to save at least some jobs. This message has been particularly challenging to hear in a socialist environment. Even with the concessions to Peugeot, other foreign corporations trying to manage costs and close they have been vilified in the French press by government officials and labor leaders. When deciding where to operate outside the U.S., keep in mind that the price of entry may be low, but the price of exiting can be quite costly.

Africa

There are large issues related to the distribution of wealth across Africa. These issues add risk to your operations in Africa, or your supply chain if you source from Africa. The labor unrest in the mining industry is perhaps a view of what could come across the continent. The Marikana incident in South Africa, where wildcat strikers were shot at by police, was exacerbated by interunion issues. South Africa and many other African nations have catapulted to a mature operating model of business with unions representing workers. The issue for these countries is that most of the business in Africa is resource driven and subject to global commodity fluctuations and demand drivers based on product developments. Here too, the cost of exiting a business can be high, as social responsibility issues are significant. In fact, the cost of exit may result in government takeover of certain sectors. The only way to balance wage demands with shrinking economics in a business

is through populist tactics and nationalizations of businesses. This is an event that can be insured against if you take the coverage before the storm begins.

Latin America

In Latin America, government involvement or interference is a key issue. Many Latin American countries are very regulated, particularly in resource-driven businesses. These governments are also often your end customer for goods and services. Risk managers should consider contract frustration coverage and pay particular attention to the labor situation on the ground.

When a resource-based business closes, there is no other option for employment in many of these geographies. Entire cities are dependent on one underlying commodity. Resource-driven economies have a special issue; when the resources go away or become unprofitable, so do the jobs. Labor forces are not always mobile, and these changes leave lasting impacts, as in the U.S. rust belt. As a risk manager, you need to be prepared for the worst; consider political risk insurance and supply chain coverages to augment your property and casualty programs.

You need to think about your global partners’ employees and

facilities as you would your own.

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Asia

As we move to the east, a different problem with labor appears on the continuum. Effectively organized unions are desperately needed in Asia, where workers are exploited and placed in unsafe environments. Unscrupulous factory owners in many countries have squalid and unsafe working environments as in the example of the Dhaka building collapse. Global demand for “fast fashion” clothing items and high-tech electronics push the factories to massive production schedules on short notice. These countries have the workforce to meet these demands, but they do not have the safety infrastructure to do so in many situations. As a risk manager, site visits are necessary, planned and surprise visits to stay ahead of this issue. Additionally, pressure on local governments is required. A fundamental tenet of good government is the protection of citizens. Connections with local governments and also NGOs to keep governments honest is vital.

In China, we continue to hear of employee unrest at Hon Hai (FoxxConn), one of the U.S. technology industries key suppliers. The issue at Hon Hai is not unsafe working environment, it is the cultural demands of a society driven to achieve. Workers in China are signing up to move to the city and work in barrack-style factories; they are leaving their support systems of family and community. There is a culture of job jumping and overwork for financial incentives. Chinese companies are trying all kinds of ideas to keep workers happy, from social events like talent shows, to production competitions. The culture in China is driving workers

to choose to work so many hours to keep up with new product demand that it is impacting their mental health. These workers are in need of a support system in the workplace beyond games and shows. If you are operating in China or working with a Chinese partner, you need to know what is going on with workers on the ground. This issue will only increase as the Chinese drive to become a society of consumers crashes into global economic issues and a rising labor cost base in China.

So, now that we have taken a quick tour around the world, let’s pull it all together into a few themes for you as the risk manager. The basics of business apply in the new normal economy: income must equal or exceed expenditures or you cannot survive. For workers, the ability to be successful in the system depends on the ability to influence either side of the equation. The global economy continues to put pressure on this system, and the worker is not immune to feeling the effect of the pressure. These pressures add risk to your business that in some cases can be mitigated by insurance.

June 2013 • Lockton Companies

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Recognize the Vast Network of Your Business Both Upstream and Downstream in Your Supply Chain

You should have a plan to manage risk as if those entities were inside the walls of your company. You have a financial duty to protect your organization’s assets from risk. These risks include things many of us do not think about every day. What happens if there is flooding in Thailand, human tragedy in Bangladesh or workplace violence in India? How effective is the local government in protecting workers or that part of the problem? If you are not critically reviewing the risks to your business globally, you may not be prepared should tragedy hit.

To start, begin to understand your global supply chain in detail. There are hidden risks that do not appear on payroll runs or statements of property values. Best practices call for transparency that goes beyond the fire engineering of a building and even beyond social responsibility. If the trend in China is any indication, human wellness will become a much bigger part of the risk management approach in global companies. If you operate globally, you need to know about the operational and employee details of all locations. If you outsource your manufacturing, you need to know a great deal about your partners. You need to think about your global partners’ employees and facilities as you would your own. They deserve the same level of safe and hazard-free work environment that your employees enjoy in the U.S. You cannot outsource risk management to a third party; third-party consultants used to verify outsourced arrangements have no stake in the liability or fallout from a catastrophic disaster. Dhaka has shown us we need to be there on the ground looking at everything as if we are underwriting the risk.

Second, Look at the Supply Chain and Cost/Margin Structure

Risks with sourcing globally should be included in the decision upfront. Disruptions, civil unrest and strikes among your workforce can be not only damaging to your operationally productivity, they impact the safety of your workforce and oftentimes become news events with real costs and impacts on your sales. A well-structured supply chain risk management plan incorporates best practices from supply chain consultants, risk management teams from Lockton, and your insurance carrier partners. It must then be married with active participation from your organization’s leadership and accountability across the chain. For the risks you can transfer to insurance, you should. For others, you need active and accountable plans to manage them. Sourcing from a global supply chain provides lower costs from labor and resources. It only makes sense that some of that margin can be used to manage the risk of sourcing.

The sad and cruel irony of Dhaka is that the workers were put at risk to rush to dispel a disruption caused by workers’ unrest. Now, the entire economy of that country will suffer as western business leaves. Insurance can make you financially whole for a loss related to these labor issues, but nothing can repair the impact on the workers if risks are not managed properly.

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