Sweatshop Labor and the Exploitation Problem
Labor faces a coordination problem: the actors involved can’t reach a better moral position via unilateral action.
When I was in India for a study abroad trip, I visited a textiles factory that was producing clothes for H&M. The owner of the factory walked us through low-ceilinged rooms crammed full of people stitching clothes together and dying fabrics. It was hot; the air was stale; the machines and people created a constant roar of noise. The owner was proudly describing the quality of the factory and working conditions while I, along with my classmates, looked on slightly aghast at the workers, thinking “what do the BAD factories look like?”
My last post ended with some questions about why sweatshops exist. Is it because factory owners are greedy capitalists? My take is that most people are pretty decent, and where there are systemic evils in the world it is probably due to poorly designed incentives or a structural failure of the social/cultural/political landscape. If that is true, then what are the incentives that are creating the horrible conditions in sweatshops? What are the structural problems creating this moral failure?
Sweatshop Labor and Neoliberal Economics
Hundreds of millions of people in poor countries around the world are engaged in labor for which they are paid pennies. Workers in textiles, electronics factories, manufacturing, and just about any other offshored industry are paid little to work long hours, often in dangerous and unhealthy conditions, in order to produce cheaper products for consumption in overseas markets like the United States.
The logic espoused by an introductory economics textbook would state that firms who compete on the basis of price–say, a mall-brand clothing manufacturer like H&M–are simply seeking out locations with a comparative advantage in cheap labor. This cheap labor enables lower prices so they can compete. Importantly, the standard neoliberal economic logic would say that firms HAVE to seek out this cheap labor; if they don’t, their goods will be too expensive relative to competitors, who will outcompete them and take their market share, and then the production will be occurring in the sweatshops anyway under the name of a different brand.
Cheaper products are good for consumers. As I discussed in my last post about incommensurate goods, cheaper products in the US create social benefits, such as poor Americans being able to buy cheaper clothes at Wal-Mart sewn in Bangladesh or solar developers being able to deploy more megawatts of solar thanks to cheap solar panels from Malaysia, at the expense of worker exploitation in these countries, which is clearly bad. I posited, like a good utilitarian, that the way to resolve this incommensurability issue was via a careful cost-benefit analysis of well-being.
It is plausible that, using this framework, exploitation of workers may create a net gain in well-being relative to the world where there is no labor exploitation and the would-be sweatshop workers instead had to pursue these other options. After all, there has to be a reason that the workers are choosing to work at the sweatshops. What are the alternatives for a person working in a sweatshop?
William MacAskill, Oxford philosopher, states “People rightly recognize that sweatshops are absolutely horrific places to work, no one doubts that at all. But the alternatives are even worse. Things like scavenging from dumps, unemployment, prostitution, street hustling, or back breaking farm labor, often all those things are low pay as well as being horrific.” Subsistence farming probably represents another major alternative. In his book “Doing Good Better”, MacAskill references an interview with a Cambodian woman who scavenges from dumps who wishes she could work in a factory as evidence that people are choosing to work in sweatshops because it beats the other options they have. Sweatshops represent many people’s least-worst alternative, unfortunate as it may be.
I think it would be useful to try and imagine the possible counterfactuals to the situation of the H&M factory I visited in India. Imagine that India unilaterally passes a strong set of labor laws mandating a high minimum wage for factory workers, safer working conditions, and humane hours. Applying the standard neoliberal economic logic in a simplified form to the H&M situation, we would find H&M is optimizing according to the incentives of a capitalist system; the comparative advantage of locating the factory in India is cheap labor and companies will relocate their operations to India to the extent that they can reduce costs to increase profits. When wages rise due to the new Indian labor law, the comparative advantage of H&M producing textiles in the Indian factory relative to the cost of shipping the goods to a mall in the United States will shrink. At that point, H&M will either find a country with wages low enough to justify the shipping costs, move production back to the US, or raise the prices of their clothing (or some combination of these options).
If H&M relocates to Vietnam from India, all of the Indian workers will be left unemployed or forced to engage in the kinds of worse, dangerous work mentioned by MacAskill above, but now Vietnamese workers will have more gainful employment instead of engaging in those undesirable alternatives to the sweatshop labor AND goods will be produced at the same lower prices for consumers. Neoliberal logic says worker well-being, on a global basis, is net neutral and the consumer surplus is better when a firm minimizes its costs by finding the cheapest global labor.
Moving production back to the US would seem to create less global well-being. A factory in the US would employ fewer people (bad) and pay them more (good), but workers in the US have better alternative employment opportunities and social safety nets compared to the displaced workers in India, meaning that the opportunity cost of losing the factory is higher for the Indian workers than the American workers. Furthermore, the American-made goods will cost more, forcing consumers to spend a higher portion of their income on clothing. Finally, if only H&M made this choice, they would quickly be outcompeted by others that still use sweatshop labor and we would be back to square one.
Thus, given these options, to maximize well-being it seems best for a company to move its operations to the place where it can produce products for the least cost. In summary: when a worker becomes employed in a sweatshop, they are choosing their best, or perhaps better said as before, least-bad, option. This also appears to be the desirable option at the global well-being level.
Contra the Neoliberal Consensus
I think it is hard to argue against the idea that workers are indeed choosing their best option given their limited decision set; although a bit of a tautology, if these folks could work jobs that were more desirable (safer, higher pay, better hours, etc.) then they would be working those jobs rather than the sweatshop.
The open question is “are workers freely making this choice?” As my Jacobin-reading friends would rightly point out to me: the reason these people face this decision is because they exist within a political economy that demands it. In our capitalist world, economic coercion forces this “least-bad” choice onto workers. Economic incentives force firms to adhere to profit-seeking behavior and so they engage in regulatory arbitrage to find the locations with the most-lax labor requirements to locate their manufacturing.
Furthermore, many would note that a primary reason workers face this wicked choice is derivative of the colonialism that European powers forced on much of the world for the past few hundred years, followed by the Global North’s economic imperialism of the last century to now. The reason the alternatives now are so bad is because the traditional alternatives have been destroyed over recent centuries. Frankly, I find this path-dependence argument only moderately compelling since peasants scraping by via subsistence-level farming—one of the potential alternatives to sweatshop labor that workers reject in favor of factory work—composed >90% of the population in most societies pre-industrial revolution (per Sapiens, p. 351), but it’s impossible to say what these societies may have done in the absence of the parasitic influence of colonialism. And parasitic it was; for example, a recent study estimated that the British siphoned tens of trillions of dollars of wealth from India over its centuries of colonial rule there.
Finding a solution in an imperfect system
What would it take for firms that compete primarily along the dimension of price to improve labor conditions given these incentives? I’ve had trouble finding reliable breakdowns of the cost of goods sold of textiles, but it seems that labor costs are, at most, less than 5% of the cost of producing a piece of clothing in a sweatshop situation. This means that if a shirt costs $10 to produce, the labor is no more than $0.50. While the distribution of labor as a percentage of cost varies across industries, it seems probable that companies should be able to either absorb higher labor costs via lower profit margins, raise prices slightly, or some combination of the two to provide workers better living conditions while still being viable businesses and without customers having to pay too much more for products.
Companies like Patagonia, which make ethics a part of their brand, can charge a premium that customers will gleefully pay for paying living wages to their workers. Companies that compete on price, though, cannot unilaterally increase their costs or their prices without losing market share to less morally scrupulous companies.
Labor faces a coordination problem. In the language of economics, we are in a bad equilibrium: the actors involved can’t reach a better moral position via unilateral action. It’s a multipolar trap.
Labor conditions would be in a better equilibrium if all global actors were forced to raise standards. Globally, workers have become a victim of a race to the bottom in labor standards. If the minimum required standards were universally higher, worker well-being would increase and firms that compete on price wouldn’t be punished for unilateral moral action and doomed to fail to actually improve standards.
We had the same abhorrent conditions of sweatshops in the United States until the federal government passed a number of worker protection laws starting in the 1930s, such as the Fair Labor Standards Act of 1938, which instituted a minimum wage, 40-hour work week, and prohibited child labor, or numerous laws codifying the right for workers to engage in collective bargaining. The issue with India taking this approach though is that in today’s globalized world, all it takes is one other country to NOT have supportive labor laws and companies will face pressure to relocate to that country where labor will be cheaper. Unilateral effort can’t solve a multipolar trap / bad equilibrium, only coordinated effort can.
Until we achieve coordination: minimize harm
Sweatshop labor is one variable in a complex moral and practical equation. Banning sweatshop labor could lead to bad, unintended outcomes by increasing unemployment, reducing economic opportunity, and raising prices of goods around the world. On the other hand, these labor conditions are deplorable and require addressing to improve global well-being. In today’s highly-globalized world, unilateral action by single states or actors is not sufficient to escape the multipolar trap created by the incentives of our political economy; we need collective, coordinated action.
I’m not sure what that collective action will look like. It might be global political changes, increases in the power of transnational organizations, international union efforts, or economic coercion by multinational firms or powerful states to improve labor standards. Until that collective action materializes, however, we should pursue the least-bad alternative.
To go back to the Exploitation Problem from the last post: George doesn’t want to go blind. He wants to work, even if his best option is really a least-bad option. George should be able to work while we search for a way to properly structure our political economy to instill morally acceptable minimum standards that can survive the interconnectedness of the global economy’s labor markets. Taking this option from him would be trading exploitation for paternalism, with a worse outcome to boot.