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Wednesday, September 2, 2015

How Not to Help Sweatshop Workers

What’s the Right Thing to Do for Developing-World Laborers?

You hear that H&M buys shirts from a factory in Bangladesh that works its employees long hours under harsh conditions and low pay. What’s the moral thing to do?

Should you publicly shame the company for its iniquitous practices? Call on the government to improve wages and working conditions? Buy your shirts from someone else? Propose that the company raise prices so workers can get paid more?

Actually, if you really want to be socially responsible, the first thing to do is be as sure as possible that actual harm — from the perspective of the workers themselves — is taking place. (For more on this topic, see “Banning Sweatshops Only Hurts the Poor.”)

Freeman writer Ben Powell addresses the consequences of outright bans in this video and short essay.

As long as the workers are there by choice, they consider themselves better off with a “sweatshop” job than without one. Banning sweatshops pushes poor people into worse alternatives and slows economic development to boot.

So what’s the alternative?


The public-shaming option is the method of comedian John Oliver. Comedy is a powerful manipulator of public opinion, whatever the entertainer’s ideology, but don’t expect a fair analysis. Oliver mocks and demonizes some big companies for getting their clothes from factories in developing countries to sell at low prices in the West.

He assumes that the low-priced clothing sold by the likes of Zara and H&M comes at the expense of poor workers in developing countries like Bangladesh. Powell skewers that assumption.

But if you’ve done your homework and conclude that you have to do something, one response might be to boycott.

According to the Guardian, the “voluntary” boycotts that actually succeed in making companies change their policies are most successful when they are backed by the threat of organized violence — that is, by government. Such boycotts may hurt the affected workers.

But if I had reliable information that a company was mistreating its employees (from their own point of view), then I might be tempted to boycott its products. Let me try to outline how boycotting might actually improve workers’ well-being, and you’ll get a sense of how complex the issue is.

If you really want to be socially responsible, the first thing to do is be as sure as possible that actual harm is taking place.

Nonviolent boycotting, on a large enough scale, may cause the company to change its practices if there’s enough nearby competition for labor, or if there are no laws preventing competitors from entering the local market. Suppose you boycott company A. Other things equal, A will lose revenue and have to cut costs, firing people and closing factories. But if you start buying from A’s competitor, company B, then B’s increased demand for labor may absorb some or all of the people laid off by A, if B operates in the same locale and if regulations permit companies to easily hire and lay off workers.

Unfortunately, if B operates far away from A — say, in a different country — your boycott may help workers in B’s country without helping those who work for A. In fact, it will probably make things much worse for them. Or, if regulations make it costly to hire or lay off labor, then even if B is nearby, it may not have an incentive to hire.

Again, it’s possible that a large-scale boycott of A might place pressure on A’s government to permit other companies to enter and give workers more employment choices. But places like Bangladesh, which has one of the most corrupt governments in the world, aren’t ideal partners for improving working conditions via political means.

“Socially Responsible” Trading

There are many aspects to “social responsibility,” but let’s focus on the issue Oliver raises: actions taken to deliberately improve the pay and working conditions for people in developing countries. (Some will argue that the free market is inherently socially responsible, but I’m exploring the other meaning here.)

Comedy is a powerful manipulator of public opinion, but don’t expect a fair analysis.

Some smart and caring people have suggested that a company could earn an “ethical company badge” by charging more for its product and using the proceeds to stipulate that their suppliers in the developing world pay their workers more. Assuming goodwill all the way down, might this work? Suppose you propose charging an ethical premium of 20 percent. Your customers are used to paying $10 for a shirt, but now you’re asking for $12.

Market prices aren’t arbitrary. There are probably good reasons why H&M’s prices are what they are. If the company raised shirt prices by a significant amount, then those who could only afford $10 per shirt — many of them young and poor — would buy fewer H&M shirts at $12.

But let’s say that all your customers are also “socially responsible” and sufficiently well-off that you don’t lose their sales. They’re happy to pay the premium. That means, however, that they will now have to buy fewer other things than they would have, and, other things equal, that could make conditions worse for workers in other industries. In fact, your customers may already be happily paying an ethical premium for other items and so can’t afford more than $10 per shirt even though they may sincerely support what you’re trying to do.

So why not simply pay your supplier more now, without raising your price, under the same stipulation? Probably because you operate in a competitive market in which the price of garments is very close to the unit cost of production (including your normal profit) and you’d suffer losses if you did this. As a result, you would have to lay off some of your workers or try to make them work harder for the same pay.

If you can successfully pay your suppliers more without charging more for shirts, it might mean your market isn’t competitive and you’ve already been earning above-normal profits by pricing above unit costs. That situation isn’t sustainable without government protection of a cartelized industry. The companies mentioned in Oliver’s video are probably in highly competitive industries where the profit margin is already thin.

If you did try to pay suppliers more without raising your prices, your own workers probably wouldn’t like it, because it could mean lower wages or worse working conditions for them.

On the demand side, socially responsible trade can work if a company’s customers are wealthy enough to pay more and if the ethical badge creates a strong brand loyalty to the product. And on the supply side, it would help if a company has unusual profit margins (which probably means it is in a government-protected industry) or if its workers are rich enough and willing to sacrifice wages and working conditions to enable the company to pay higher prices for overseas products.

So it’s not impossible to make things a little better for the poor through socially responsible trade. But it’s complicated, and the odds aren’t good. The more effective way to help them and everyone else is to challenge the institutions that constrain economic liberty and hinder economic development, even if that means for a time tolerating sweatshops and inexpensive clothes.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.