September 2000 Fraser Forum: Working 9 to 9
Many people around the world labour in conditions that most of us in developed countries find unacceptable and, perhaps, unimaginable. Groups such as United Students Against Sweatshops (USAS), the International Labor Rights Fund (ILRF), and the Union of Needletrades, Industrial and Textile Employees (UNITE) routinely rally against these conditions and demand that something be done.
These groups call for extensive monitoring systems, increased wages, restrictions in hours worked, and complicated certification procedures. They also advocate using boycotts to punish negligent companies and, in some cases, trade restrictions to further their goals. Reduced to its core their inquiries are simple: "Why can’t company X pay its workers more to produce the shoes I buy? Why must such conditions continue to exist in this modern age?"
When competition exists, wages are linked to productivity. If a company earned huge profits by paying workers excessively low wages, what would happen? If free entry is allowed, another company would enter the market and attract the underpaid workers by offering slightly higher wages. The second company would still earn relatively high profits. This process of entry would repeat itself until wages were bid up and profits were bid down to competitive levels.
Because the proposed reforms have the effect of increasing the cost per worker without doing anything to increase the ease of entry or the level of productivity, they are more likely to hurt, rather than help, those working under these conditions by reducing employment opportunities. Furthermore, insomuch as increased costs were reflected in final prices, product demand would also be reduced. Additional job reductions, rather than increases in the standard of living, would be the result. One beneficiary of these increased foreign labour costs would be domestic labour unions like UNITE, who, not surprisingly, favour these proposals.
In order to generate positive progress, increased competition for labour and increases in productivity must occur. This can only happen through further liberalization and trade. The Canadian government should encourage the expansion of trade by eliminating tariffs and other trade barriers imposed on developing countries.
Reducing the cost of starting a legitimate business, enforcing the rule of law and self-ownership, and lowering restrictions placed on foreign investment, trade, and labour mobility are positive steps that foreign governments can take to reduce the prevalence of sweatshops in their countries. Freely functioning labour markets promote the general well-being of labour better than any protest movement can.
In nineteenth century Britain, mill towns were often characterized by violence and poor living conditions, but markets were generally freely functioning and labour was mobile. The competition for labour and mobility of labour meant that if working conditions were poor, employers had to pay a premium for labour services. Research by economic historians shows that factories located in towns with higher infant morality rates had to pay higher wages to unskilled labour. Other research shows that factories using corporal punishment paid wages 16 to 18 percent higher than those that did not. The market itself played the role of "monitor," without corporate codes of conduct or consumer boycotts. Given time and increasing productivity, this meant vastly superior living standards for successive generations. This process should be repeated in other countries.
In fact, this process is already occurring. Wages paid by multinational firms in developing countries are often much higher than what local firms pay. A 1998 study by the Institute for International Economics found that in the least developed nations, annual wages paid by affiliates of US multinationals were 8.5 times higher than average per capita GDP! For wealthier less-developed nations, annual wages were, on average, still an impressive 3 times as large.
A Cato Institute study by Aaron Lukas noted that a survey of US-based companies in Beijing found that labourers were paid, on average, US$5.25 per hour, excluding benefits, or about US$10,900 per year. This compares to a per capita GDP of US$860. In a US-owned factory in Shanghai, wages were about three times higher than wages for comparable work in a non-US factory. This was, not surprisingly, nearly eight times higher than a United Auto Workers’ estimate of wages paid.
Recent research also shows that countries with more flexible labour markets have more people involved in the labour force, lower unemployment rates, and lower rates of long-term unemployment. These three benefits would improve the conditions for those in developing countries who are living at or near subsistence levels.
Simple-minded interventions will not solve the problem of sweatshops. A free and open economy unburdened by unnecessary government restrictions is necessary for growth and increased living standards. If the goal is to help those in developing countries instead of domestic union members, then rather than advocating unproven and potentially harmful courses of action, these organizations should advocate market solutions that have been proven throughout history.
Bibliography
DiTella, Rafael and Robert MacCulloch. The Consequences of Labour Market Flexibility: Panel Evidence Based on Survey Data. Electronic copy from author, 1999.
Graham, Edward M. "Trade and Investment at the WTO: Just Do It!" in Launching New Global Trade Talks: An Action Agenda, Special Report no. 12. Institute for International Economics, September 1998.
Gunderson, Morley and W. Craig Riddell. Labour Market Economics: Theory, Evidence and Policy in Canada. (3rd edition). Whitby, Ontario: McGraw-Hill Ryerson, 1993.
Lukas, Aaron. WTO Report Card III: Globalization and Developing Countries. Trade Briefing Paper No. 10. Washington: The Cato Institute, 2000.
Dexter Samida until recently wasResearch Economist at The Fraser Institute. He has an MA in Economics from the University of Toronto.
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