Evaluating Anti-Sweatshop
Of course a firm would want to pay this worker less than $2.50 per hour in order to earn greater profits. Ideally the firm would like to pay the worker nothing and capture the entire $2.50 of value he creates per hour as profit. Why doesn’t a firm do that? The reason is that a firm must persuade the worker to accept the job. To do that, the firm must offer him more than his next best available alternative. The amount a worker is paid is less than or equal to the amount he contributes to a firm’s net revenue and more than or equal to the value of the worker’s next best alternative. In any particular situation the actual compensation falls somewhere between those two bounds.
Wages are low in the third world because worker productivity is low (upper bound) and workers’ alternatives are lousy (lower bound). To get sustained improvements in overall compensation, policies must raise worker productivity and/or increase alternatives available to workers. Policies that try to raise compensation but fail to move these two bounds risk raising compensation above a worker’s upper bound resulting in his losing his job and moving to a less-desirable alternative.
What about non-monetary compensation? Sweatshops often have long hours, few bathroom breaks, and poor health and safety conditions. How are these determined? Compensation can be paid in wages or in benefits, which may include health, safety, comfort, longer breaks, and fewer working hours. In some cases, improved health or safety can increase worker productivity and firm profits. In these cases firms will provide these benefits out of their own self-interest. However, often these benefits do not directly increase profits and so the firm regards such benefits to workers as costs to itself, in which case these costs are like wages.
A profit-maximizing firm is indifferent between compensating workers with wages or compensating them with health, safety, and leisure benefits of the same value when doing so does not affect overall productivity. What the firm really cares about is the overall cost of the total compensation package. Workers, on the other hand, do care about the mix of compensation they receive. Few of us would be willing to work for no money wage and instead take our entire pay in benefits. We want some of each. Furthermore, when our overall compensation goes up, we tend to desire more non- monetary benefits.
For most people, comfort and safety are what economists call “normal goods,” that is, goods that we demand more of as our income rises. Factory workers in third world countries are no different. Unfortunately, many of them have low productivity, and so their overall compensation level is low. Therefore, they want most of their compensation in wages and little in health or safety improvements.
Evaluating Anti-Sweatshop Proposals
