Exploitation—Part IV (e), Exploiting Exploitation−Additional Negative Effects

As was explained in Exploitation Part IV (d), the most self-defeating effect of the anti-sweatshop movement was that it slowed the progress of impoverished countries along their path to prosperity. That worst effect was caused by the higher costs (both in money and reputation) of operating factories in places that desperately needed more, not fewer, factories and the fear that the activists instilled in companies that would have otherwise considered starting or expanding operations in impoverished countries. Consequently, the movement helped a handful of poor people at the expense of more than a million times as many other poor people everywhere in the world, especially the poor in impoverished countries. As if that were not bad enough, the anti-sweatshop activists were also unaware (or didn’t care) about a couple other self-defeating consequences of their movement.

Displacement of Lowest Skilled Workers: When working conditions and/or pay for jobs are increased (e.g., by an imposed minimum wage), the lowest skilled employees holding those jobs at the time of the imposition of the higher wage are, to a large extent over time, replaced by higher-skilled workers from outside the company.[i] Let’s sort out why that is.

An unavoidable fact of life is that some people are more productive than others.[ii] For example, no matter the Nike factory job, some people are capable of producing more work product per hour than others. In general, the people who apply for especially low-paying jobs are especially low-skilled people relative to other workers in their market. Those employees are especially susceptible to competition for their jobs from higher-skilled people.

Let’s look at a hypothetical situation to see how the lowest-skilled workers are disproportionately disadvantaged by minimum wage increases. Let’s say that before the activists began their hectoring, (1) Nike was paying its widget makers 10¢ per hour to make the most widgets they were able to produce in an hour, which was 10 widgets (1¢ per widget), and (2) a native factory owner was paying his widget makers 15¢ per hour to make 20 widgets. Then let’s assume that the hectoring caused Nike to pay widget makers 20¢ per hour.

First, note that the higher skilled workers in native factories had to have preferred to produce twice as much as the Nike workers for only 50% more pay (and probably worse working conditions). If those workers preferred to work less hard for less pay, many of those workers would already be working for Nike.

The consequences of this situation are inevitable:

  1. Many (if not all) of the higher-skilled workers in native factories would love to have an extra 5¢ per hour (33% more pay) for producing the same number of widgets as they produced for the native owner.
  2. By firing its existing workers and hiring the higher-skilled workers Nike’s labor cost per widget would be unchanged (1¢ per widget) after the amount it paid the widget makers was doubled.
  3. As a result of a) and b), the lowest-skilled Nike workers will be displaced by higher-skilled workers.
  4. The resulting realignment of workers will:
  5. Cost Nike essentially nothing,
  6. Raise pay for a lucky few higher-skilled workers, and
  7. Cost the lowest-skilled workers their jobs and hope for a better future.

In addition, the native employers who lost those higher-skilled workers were harmed and, as the findings of the study[iii] discussed in Part IV(e), the number of low-skilled domestic jobs in Indonesia fell very significantly.

Surely this is approximately the opposite of what the anti-sweatshop activists had in mind. That is what happens when people pursue policies based on emotions rather than their minds.

Misplaced Burden: Good people wish that every worker could earn at least a “living wage” (definitions vary). Sadly, not every worker has sufficient skills to produce goods or services worth a little less than[iv] a “living wage” (more technically, the value of their “marginal product”[v]). If people are to be paid more than the value of their marginal product, someone must supply the money to bridge the gap. If the goal is for as many unskilled workers as possible to have a living wage, perhaps the most important issue in figuring out how best to accomplish that worthy goal is: “Who should bear the burden of bridging the gap between the value of the employee’s marginal product and the amount (“living wage”) the employer must pay for that product?”

First note that no employer caused any low-skilled workers to have low skills, i.e., the employer is not responsible for the existence of the problem for which a solution is needed. If society decides that this problem should be addressed, everyone in society that can bear part of the burden should.[vi] If society nevertheless decides that employers must fund the value gap (which is a bad idea), the question should be (but essentially never is), “Which employers should bear that burden of solving the societal problem?” Because that question is essentially never asked, societies almost always allow emotions to provide the answer—which, as usual, results in the wrong answer being chosen.

To achieve the stated goal of providing as many as possible low-skilled jobs that pay a “living wage” to low-skilled workers, the last companies that should be dunned for the value gap are the companies that hire low-skilled workers. That creates a direct and large incentive to use robots instead of people for as many low-skilled jobs as possible (or not to start or expand a business that uses low-skilled workers). If anything, the companies that hire low-skilled workers should be rewarded, not punished, for hiring low-skilled workers—so that they buy fewer robots and create more low-skilled jobs. So, if society wants (1) low-skilled workers to be paid more than the value of their marginal product, and (2) companies to bear the burdened of that societal goal, the burden of achieving that goal should be placed on employers in proportion to the percentage of their employees who are not subsidized, low-skilled workers. Under this scheme, companies that hire fewer low-skilled workers should subsidize companies that hire more low-skilled workers. In that way, society would burden the companies that are doing little to solve the societal problem and would reward those that are solving the societal problem.

Minimum wages do precisely the opposite. In effect, those requirements relieve companies that do not employee low-skilled workers of the societal burden and impose the burden on those companies that are helping solve the problem. The current scheme is a recipe for fewer low-skilled jobs, higher unemployment, greater welfare costs, and injustice. This is precisely the recipe that the anti-sweatshop movement served up.

Policies that do not discourage employers from employing more low-skilled people are needed everywhere. This is especially and desperately so in impoverished countries whose percentage of low-skilled workers is especially high. Policies that disproportionately hurt the very employers who employ low-skilled workers exacerbate the problem. People who exacerbate this problem should be called out and condemned. Hopefully, this series of blog posts has done that.


AUTHOR’S NOTE: I am not saying that dunning companies that hire few low-skilled employees or subsidizing ones that do are good ideas. In fact, it is a bad idea because (1) it grants too much power to government (which is already too powerful) and the government is inefficient, ham-handed, and corrupt in almost everything it does), and (2) it distorts the market, i.e., it renders the market less effective at solving society’s problems. As bad the above-proposed improvement is, however, it is far better than what society is doing right now to address the important societal problem of too many people having low skills.

[i]        See “The Cruelty of the Minimum Wage.”

[ii]       There are exceptions to this rule with respect to astoundingly exceptional people. Because minimum wage impositions are a non-issue in those circumstances, we need not delve into this exception here

[iii]      See “The Nike Effect: Anti-Sweatshop Activists and Labor Market Outcomes in Indonesia.”

[iv]       See “Exploitation-Part III, The Dangers of Incorrectly Detecting Exploitation.”

[v]      See “The Marginal Product of Labor.”

[vi]      See “Skin in the Game: Hidden Asymmetries in Daily Life” or “Nassim Nicholas Taleb on Work, Slavery, the Minority Rule, and Skin in the Game.”

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