Sweatshops & Pay
What is pay that is so poor it warrants protest from third parties?
What is a "living wage"?
In the last post, I cited these two definitions
According to the BLS, the median weekly income in the US for 2004 was $638. That works out to about $15.95/hour on a 40 hour week. Do we really need to raise everyone to that, no matter how much experience, skill, or other desirable qualities they possess? If so, where is the motivation to actually acquire difficult skills? Incentives matter.
The phrase "living wage" is bandied about, but this is a rhetorical flourish intended to imply that below this people must be dying. It therefore makes no sense to say that someone is surviving on a wage below a "living wage". The counterargument is usually that the below-living wage doesn't provide for their needs. What are "needs"? Needs, properly understood, are those things which cannot be done without. If people are living without the things without which they cannot live, then they must not be needs -- strong "wants" perhaps, but not needs.
What then is an acceptable compensation? This depends on place and time. $15.95/hour would have made you the King of New York 200 years ago, might barely pay your bills in Manhattan but would be quite nice in El Paso today, and would make you a wealthy man in Indonesia at any time. Your compensation -- which includes all of the things you receive, including benefits -- must be worth to you at least the value of the time you spent at the second best option. Your cost to the employer -- the compensation plus the cost of complying with other requirements like administrators, payroll tax, etc. -- must be worth to your employer at least what you add to the firm's value. Does that sound harsh? If the employer pays everyone more than they earn, he goes out of business. Eventually, everyone must be employed by someone who earns what they receive because all other employers seem to disappear. It's like ... magic. In between your minimum and the employer's maximum, there may be room for negotiation, and it is within those two constraints that successful negotiations must conclude.
Let's suppose that you have a job where the pay is such that there are approximately as many people as these kinds of jobs. The pool of people who consider those particular jobs is a well-defined, steady set of people. Now, double or triple the pay -- don't you suppose that there will be new people lining up for those jobs who never considered them before? So just guess what it means when workers are lined up for these jobs that don't pay a living wage -- what does that say about the relative pay and availability of alternatives? It says, to me, that this kind of job is paying enough to draw workers away from other possible means of earning a living. What does it mean when workers go on strike over overtime, not because management is cutting overtime wages, but because management is cutting back on overtime hours? (Via MarginalRevolution) It says, to me, that the workers believe their time is better spent working in the factory than in any other pursuit open to them.
The real problem in developing countries is that there aren't enough jobs to go around for the people there. I suspect that many of those countries are in the transitional period from an agricultural society where 50% or more are farmers, to one in which modern farming methods have freed up most of that workforce for other pursuits ... but they haven't developed "other pursuits" yet. What they need is capital, both physical and human. They need an environment in which capital will flow freely to its highest valued use, not one in which capital might suddenly be grabbed by politicians and declared to be for public use or national security.
Another note: you will frequently come across the claim that workers need to be able to afford the product they are building. Really? Does Boeing underpay their engineers? After all, not a single one of them could afford a 747 - and they are unionized! I doubt most Ferrari artisans could afford a new, top-of-the line Ferrari. What about mansions? This dictum is obviously silly, even as a universal goal. At best, I think you could say that garment workers should be able to afford some garments, though not necessarily the garments they happen to be making if they happen to be high end garments, and certainly not at the prices they will bring in the target market. Worker nudity is not a problem which I have ever heard anyone protest. And no, I don't know why anyone would pay $100 for a pair of Nikes -- but that price is driven by demand in a country where we can afford to pay it, so it makes no sense to point out that they aren't affordable in a country where everything else -- everything! -- costs less than it does here, sometimes by orders of magnitude.
The key measure here is purchasing power parity (PPP) to convert between host country currency and US currency instead of the all too common market rate. The PPP of the renminbi is three times the market exchange rate, meaning that exchanging $1 into renminbi at the market rate would yield about 3x the amount of goods as it would in the US.
Not only do activists rely on readers' ignorance of purchasing power parity to dramatize the plight of workers, but they also rely on the average reader's ignorance of apparel manufacturing processes. I found an article in which it was lamented that Nicaraguan workers were only making $0.66 in piece-rate-plus-benefits to sew a pair of jeans. That sounds bad, right? However, I have it on good authority that you should be able to sew a pair of jeans in between 11 and 17 minutes. That works out to between $2.33 and $3.60 per hour. Not so bad, now, eh? And given that Nicaragua's PPP is about 5x its market rate of exchange, this translates into about $11.65-$18 per hour. Now how bad does it sound?
Here are some definitions I came across for "living wage":
Something that neither these authors nor Rothstein seem to have accounted for is the fact that all wage laws discriminate against a class of people. In his essay, Defending Sweatshops: Too Much Logic, Too Little Evidence, Rothstein refers to a SCOTUS case, Adkins, but systematically fails to note that Adkins was about a gender-specific minimum wage law. It mandated minimum wages for women for the purpose of getting women out of the workforce in order to make room for men. That isn't accidental: all such laws discriminate by outlawing certain types of contracts with politically disenfranchised, unpopular, or vulnerable classes of potential employees. There is a Baptist-Bootlegger connection between people who genuinely believe that they are acting in the interest of some oppressed group, and another group of people who stand to gain from the law, and the former provide the moral cover for the latter. Adkins was about a law that discriminated against women, Davis-Bacon and the original federal minimum wages laws were meant to discriminate against contractors who hired black employees, and the original justification for Social Security was to encourage older workers to retire (a mandatory retirement age was originally proposed) to make way for younger workers and thereby raise employment among younger men during the Depression. Since nobody would ever support such laws if their basis was really known, someone has to provide the moral cover for those laws.
It is no accident, then, that the biggest supporters of these living wage campaigns are unions. There is nothing as hypocritical as an American union that includes the term "International" in its formal name (IBT, IAMAW, etc.), since there is nothing American unions want more than to stop the competition from other workers, of whom foreigners are the easiest political target.
In a sense, a union behaves exactly as a corporate monopolist, albeit a considerably more politically correct monopolist. The union wants to stop competition from non-unionized workers so that it can hold some labor back from the market and extract a monopoly rent. Sounds bad, but it depends on your view. To union members, it sounds pretty good. An employer who freely negotiates reveals that negotiation with the union is a better alternative than not negotiating with them; if that is the case, all the union has done is negotiated a better share of the company's profits. Recall my comments about the negotiating room between an employee's minimum and the employer's maximum above. In the free negotiation case, the company reveals that it is better off, the union members are better off, and consumers are no worse off.
The use of laws, quotas, tarriffs, and blackmail to achieve the same ends is not the same thing. A union utilizing campus activists as moral cover, for example, is only engaging in naked self interest. The union members may be better off, but the companies and the foreign workers may both be made worse off, and consumers certainly are made worse off to the extent that price increases are passed along to them.
I thought I would end with a round-up of evidence from scholarly resources available to me (available to you, too, if you want to pony up the $5 for the NBER studies).
sweatshop
sweatshop
What is a "living wage"?
In the last post, I cited these two definitions
- A manufacturing workplace that treats its workers inhumanely, paying low wages, imposing harsh and unsafe working conditions, and demanding levels of performance that are harmful to the workers. (www-personal.umich.edu/~alandear/glossary/s.html)
- a factory where workers do piecework for poor pay and are prevented from forming unions; common in the clothing industry (wordnet.princeton.edu/perl/webwn)
- Is "low pay" pay which is lower than the national average (or median, or GDP per capita) in the country of the factory? If so, then are factories which pay at or above the national average not sweatshops, ever?
- Why compare to the national average? Is it because of local living expense?
- Why not to some international average? And specify an international living expense? Isn't that what activists mean when they protest that they want wages in all countries raised, in counterpoint to the observation that raising wages in any one country will drive multinationals to another country?
- The "living wage" is frequently substituted, but that doesn't help much (see below).
- If pay is by piece, and if some workers are able to make a "decent wage" because they are bigger, stronger, or faster, should we ban less able workers from that trade because we don't agree with the effective hourly wage they are making?
According to the BLS, the median weekly income in the US for 2004 was $638. That works out to about $15.95/hour on a 40 hour week. Do we really need to raise everyone to that, no matter how much experience, skill, or other desirable qualities they possess? If so, where is the motivation to actually acquire difficult skills? Incentives matter.
The phrase "living wage" is bandied about, but this is a rhetorical flourish intended to imply that below this people must be dying. It therefore makes no sense to say that someone is surviving on a wage below a "living wage". The counterargument is usually that the below-living wage doesn't provide for their needs. What are "needs"? Needs, properly understood, are those things which cannot be done without. If people are living without the things without which they cannot live, then they must not be needs -- strong "wants" perhaps, but not needs.
What then is an acceptable compensation? This depends on place and time. $15.95/hour would have made you the King of New York 200 years ago, might barely pay your bills in Manhattan but would be quite nice in El Paso today, and would make you a wealthy man in Indonesia at any time. Your compensation -- which includes all of the things you receive, including benefits -- must be worth to you at least the value of the time you spent at the second best option. Your cost to the employer -- the compensation plus the cost of complying with other requirements like administrators, payroll tax, etc. -- must be worth to your employer at least what you add to the firm's value. Does that sound harsh? If the employer pays everyone more than they earn, he goes out of business. Eventually, everyone must be employed by someone who earns what they receive because all other employers seem to disappear. It's like ... magic. In between your minimum and the employer's maximum, there may be room for negotiation, and it is within those two constraints that successful negotiations must conclude.
Let's suppose that you have a job where the pay is such that there are approximately as many people as these kinds of jobs. The pool of people who consider those particular jobs is a well-defined, steady set of people. Now, double or triple the pay -- don't you suppose that there will be new people lining up for those jobs who never considered them before? So just guess what it means when workers are lined up for these jobs that don't pay a living wage -- what does that say about the relative pay and availability of alternatives? It says, to me, that this kind of job is paying enough to draw workers away from other possible means of earning a living. What does it mean when workers go on strike over overtime, not because management is cutting overtime wages, but because management is cutting back on overtime hours? (Via MarginalRevolution) It says, to me, that the workers believe their time is better spent working in the factory than in any other pursuit open to them.
The real problem in developing countries is that there aren't enough jobs to go around for the people there. I suspect that many of those countries are in the transitional period from an agricultural society where 50% or more are farmers, to one in which modern farming methods have freed up most of that workforce for other pursuits ... but they haven't developed "other pursuits" yet. What they need is capital, both physical and human. They need an environment in which capital will flow freely to its highest valued use, not one in which capital might suddenly be grabbed by politicians and declared to be for public use or national security.
Another note: you will frequently come across the claim that workers need to be able to afford the product they are building. Really? Does Boeing underpay their engineers? After all, not a single one of them could afford a 747 - and they are unionized! I doubt most Ferrari artisans could afford a new, top-of-the line Ferrari. What about mansions? This dictum is obviously silly, even as a universal goal. At best, I think you could say that garment workers should be able to afford some garments, though not necessarily the garments they happen to be making if they happen to be high end garments, and certainly not at the prices they will bring in the target market. Worker nudity is not a problem which I have ever heard anyone protest. And no, I don't know why anyone would pay $100 for a pair of Nikes -- but that price is driven by demand in a country where we can afford to pay it, so it makes no sense to point out that they aren't affordable in a country where everything else -- everything! -- costs less than it does here, sometimes by orders of magnitude.
The key measure here is purchasing power parity (PPP) to convert between host country currency and US currency instead of the all too common market rate. The PPP of the renminbi is three times the market exchange rate, meaning that exchanging $1 into renminbi at the market rate would yield about 3x the amount of goods as it would in the US.
Not only do activists rely on readers' ignorance of purchasing power parity to dramatize the plight of workers, but they also rely on the average reader's ignorance of apparel manufacturing processes. I found an article in which it was lamented that Nicaraguan workers were only making $0.66 in piece-rate-plus-benefits to sew a pair of jeans. That sounds bad, right? However, I have it on good authority that you should be able to sew a pair of jeans in between 11 and 17 minutes. That works out to between $2.33 and $3.60 per hour. Not so bad, now, eh? And given that Nicaragua's PPP is about 5x its market rate of exchange, this translates into about $11.65-$18 per hour. Now how bad does it sound?
Here are some definitions I came across for "living wage":
- A wage sufficient to meet the basic needs of a worker and their dependents (www.web.net/rain/glossary.htm).
- a wage sufficient for a worker and family to subsist comfortably (wordnet.princeton.edu/perl/webwn)
- Living wage refers to the hourly wage that one deems necessary for a person to achieve a basic standard of living. In the context of developed countries such as the United Kingdom or Switzerland, this standard is generally considered to require that a person working forty hours a week, with no additional income, should be able to afford housing, food, utilities, transport, health care and a certain amount of recreation. This concept differs from the minimum wage because the latter is set by law (en.wikipedia.org/wiki/Living_wage)
- Why must a factory pay enough for the worker and his/her dependents? Even the American middle class raises its families on two wage earners, but not all jobs can let all people lead middle class lives. If so, why would you want to become a supervisor when part-time clerk is mandated by law to pay just as well?
- How many dependents? Do we include spouse and children, or siblings and parents? Do we look at a worker's family and decide what to pay him/her? Incidentally, it's currently illegal to ask a potential employee if he is married or how many children he has. Do you figure out the worst case and then pay everyone according to that? If so, what effect do you think this will have on family and career planning? In the first case, we can predict that people will maximize the number of people they claim are dependents, maybe they even have more children if the wages provide for more than the child actually costs (not a bad assumption since actual third-world laborers manage to live despite what activists tell us). In the second case, I think we can safely predict that single men will lack ambition compared to their family-rearing co-workers, since they will, after all, be making just as much money, but will have a lot more disposable income. In any case, we can agree that mandating wages that allow a family to be supported leads to family planning by central authorities. Just as in China, we can foresee that this will mean increasing government involvement in personal decisions such as mandatory fertility controls. On the other hand, if activists simply want corporations to be responsible without government mandates, then they are effectively asking for corporations to involve themselves in workers' family planning decisions. Social planning busybodies such as Henry Ford and the author of this would be proud: "Our absurd way of regulating salaries, which concerns itself much too little with the question of the family and its sustenance, is one more reason that makes many an early marriage impossible."
- What is "comfortably"? What if the worker and his family share a house with another family? Two families? Sharing housing is an age-old trick, employed by college students everywhere to save on expenses. Is there a specific minimum amount of floorspace they need? I heard about a man in California who sells complete houses that take up less than 100 square feet - how does that sound (thanks, Morning Edition)? Does the government or employer need to take housing into consideration when determining pay?
- Why 40 hours per week, especially when farmers work much more? In England circa 1832, Parliament formed the Sadler's Committee to consider the Ten Hours' Bill, and one Tory press editor exclaimed that his staff put in 15-17 hours per day to agitate for the bill (The Factory System of Early Nineteenth Century, W. H. Hutt, in Capitalism and the Historians, F. A. Hayek, ed.). Is 10 hours a day for 4 days okay? How about 14 for one and 13 for 2? Don't laugh -- that's how medical students, Emergency Room workers (including physicians), and lawyers work, except they may do it for a lot longer than 3-4 days.
- What kind of utilities? Water, obviously. Sewer, okay, though subsidizing central sewage systems supports the non-sustainable society that many activists loathe. Electricity, maybe, but same caveat about sustainability. Telephone? I don't think so; there are plenty of alternatives, and talking to people a long ways away is not a need, as I understand "need". Cable TV? No. Broadband? No. In the future, people are probably going to perceive cable and broadband as identical, and as ubiquitous and indispensable as the phone. Heat and cooling? How much? In other words, there is a trade-off between the thermostat and another sweater (as Jimmy Carter reminded us).
- How much recreation, especially when playing in the park is free? Also, I would have included enough for education before I included recreation.
Something that neither these authors nor Rothstein seem to have accounted for is the fact that all wage laws discriminate against a class of people. In his essay, Defending Sweatshops: Too Much Logic, Too Little Evidence, Rothstein refers to a SCOTUS case, Adkins, but systematically fails to note that Adkins was about a gender-specific minimum wage law. It mandated minimum wages for women for the purpose of getting women out of the workforce in order to make room for men. That isn't accidental: all such laws discriminate by outlawing certain types of contracts with politically disenfranchised, unpopular, or vulnerable classes of potential employees. There is a Baptist-Bootlegger connection between people who genuinely believe that they are acting in the interest of some oppressed group, and another group of people who stand to gain from the law, and the former provide the moral cover for the latter. Adkins was about a law that discriminated against women, Davis-Bacon and the original federal minimum wages laws were meant to discriminate against contractors who hired black employees, and the original justification for Social Security was to encourage older workers to retire (a mandatory retirement age was originally proposed) to make way for younger workers and thereby raise employment among younger men during the Depression. Since nobody would ever support such laws if their basis was really known, someone has to provide the moral cover for those laws.
It is no accident, then, that the biggest supporters of these living wage campaigns are unions. There is nothing as hypocritical as an American union that includes the term "International" in its formal name (IBT, IAMAW, etc.), since there is nothing American unions want more than to stop the competition from other workers, of whom foreigners are the easiest political target.
In a sense, a union behaves exactly as a corporate monopolist, albeit a considerably more politically correct monopolist. The union wants to stop competition from non-unionized workers so that it can hold some labor back from the market and extract a monopoly rent. Sounds bad, but it depends on your view. To union members, it sounds pretty good. An employer who freely negotiates reveals that negotiation with the union is a better alternative than not negotiating with them; if that is the case, all the union has done is negotiated a better share of the company's profits. Recall my comments about the negotiating room between an employee's minimum and the employer's maximum above. In the free negotiation case, the company reveals that it is better off, the union members are better off, and consumers are no worse off.
The use of laws, quotas, tarriffs, and blackmail to achieve the same ends is not the same thing. A union utilizing campus activists as moral cover, for example, is only engaging in naked self interest. The union members may be better off, but the companies and the foreign workers may both be made worse off, and consumers certainly are made worse off to the extent that price increases are passed along to them.
I thought I would end with a round-up of evidence from scholarly resources available to me (available to you, too, if you want to pony up the $5 for the NBER studies).
- As noted in this study by Powell and Skarbek, apparel workers in nearly every country except Bangladesh and Indonesia make more in the apparel industry, on average, than the average national wage.
- As noted in NBER Working Paper 9669, The Effects of Multinational Production on Wages and Working Conditions in Developing Countries, Brown, Deardorff, and Stern, it is possible to construct theories showing that the effect of foreign direct investment (FDI) on host country wages is either positive or negative, depending on your assumptions about technology, technology transfer, skill sets, and so on. However, the evidence is overwhelmingly positive. They survey smpirical studies and find (among other things)
- Affiliates of US multinationals pay a wage premium (above the local prevailing wage) of between 40% and 100%
- Footwear and apparel factory workers in Vietnam are in the top 20% by household expenditures
- In Nike plants, workers earned $670 compared with a local average of $134. The figures for Indonesia alone were $720 and $241
- Nike contract workers consistently earned wages that were above national minimums
- An International Youth Foundation study found that 72% of workers surveyed considered their wages fair, and 60% were able to accumulate savings
- Controlling for education and industrialization (efficiency of scale), Lipsey and Sojohlm found that multinationals raised local white and blue collar wages 22% and 12%, respectively
- Cooke and Noble found that FDI was positively associated with ratification of International Labor Organization standards
- The OECD found a positive correlation between FDI and right to strike, right to unionize, and protection of union members
- Rodrik found a positive correlation between FDI and Freedom House democracy index, but a negative correlation with a high index of child labor
- There is some evidence that factory work entices rural workers to come into the city, causing crowding and bringing down the average wage (because workers standing around hoping for work make less than the lowest paying farm job), but this is evidence of the high pay of foreign multinationals and the lack of enough work to go around
- This paper was extremely informative in its synopsis of the response of the Clinton Administration to activists in forming the Apparel Industry Partnership (AIP), the Fair Labor Association (FLA), and the subsequent response of campus activists to form the Workers Rights Consortium (WRC). The campus activists, probably correctly, understood that government agencies are subject to capture by the interested parties. The article also discusses the union support for the campus activists, and goes on to document the blackmail tactics used to coerce universities into joining the WRC. This led to dueling letter writing campaigns by the Academic Commission on International Trade (ACIT) and Scholars Against Sweatshop Labor (SASL).
- In another NBER paper, Moving Up or Moving Out? Anti-Sweatshop Activists and Labor Market Outcomes, Harrison and Scorse find that (A) activists had an impact on the minimum wage in Indonesia, and that subsequently (B) more foreign firms exited Indonesia. This is a very technical and specific study.
- Johann Norberg has an excellent first-hand observation of the effects of Nike in Viet Nam here and a speech on globalization here. Among other points:
- The average pay at a Nike factory close to Ho Chi Minh is $54 a month, almost three times the minimum wage for a state-owned enterprise.
- Ten years ago, when Nike was established in Vietnam, the workers had to walk to the factories, often for many miles. After three years on Nike wages, they could afford bicycles. Another three years later, they could afford scooters, so they all take the scooters to work (and if you go there, beware; they haven't really decided on which side of the road to drive). Today, the first workers can afford to buy a car.
- Sure, [Tsi-Chi] makes five times more than she did, she earns more than her husband, and she can now afford to build an extension to her house. But the most important thing, she says, is that she doesn't have to work outdoors on a farm any more [10-14 hours].
- the Nike job comes with a regular wage, with free or subsidised meals, free medical services and training and education. The most persistent demand Nike hears from the workers is for an expansion of the factories so that their relatives can be offered a job as well.
- A generation ago, [Tsi-Chi] would have had to put [her son] to work on the farm from an early age. But Tsi-Chi told me she wants to give him a good education, so that he can become a doctor. That's one of the most impressive developments since Vietnam's economy was opened up. In ten years 2.2 million children have gone from child labour to education.
sweatshop
sweatshop
Labels: sweatshops, unions
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