Why Attacks on Multinationals and “Sweatshops” Are Often Misguided and Excessive

Public distrust of corporations has been rising for decades, and some of those fears have spurned greater problems than they were intended to fix. One such fear is that multinational corporations, especially sweatshops, are infiltrating poor countries, in order to employ workers through exploitative wages and safety standards. Some prominent critics have called this modern slavery, and many have lobbied for expanding labor codes of conduct in foreign countries, for boycotts of perceived exploitative corporations and for banning imports from countries with lax labor laws. These beliefs are not only common amongst progressives, but also related to traits such as nationalism, patriotism, union membership and old age.

On the other hand, several hundred economists from across the political spectrum — including popular columnists Paul Krugman and Thomas Sowell — have argued that multinationals have highly positive impacts on developing countries, when employees and employers have voluntarily agreed to a contract and when foreign affiliates are acting legally.

In contrast to claims of damage caused by multinationals, there is compelling evidence that multinationals fuel economic growth in developing countries by investing in them. This is because multinationals have greater financial resources and more advanced technology available to them, meaning that the value of goods produced by workers at multinational corporations is higher than it would be otherwise. The level of economic growth that results from their investment is positively associated with the host country’s level of human capital (i.e. the pre-existing skills of local workers and their propensity to acquire new skills), and requires a threshold level of financial development. Multinational-led economic growth involves the improvement of skills and education of employees, particularly in large firms. Larger corporations, in particular, are associated with higher productivity and a greater ability to spread R&D expenses over a larger output.

Most relevant to this debate, however, are the effects that multinationals have on labor. Critics of multinationals claim (sometimes accurately) that they underpay workers and force them into working in hazardous conditions. However, if these claims are used to form general policies about industries, we would expect that the average multinational corporation pays their employees in developing countries about the same as other local firms do, if not less.

On the contrary, there is overwhelming evidence for the opposite — multinationals, on average, offer their employees substantially higher wages than local firms do, and this effect remains even after adjusting for factors such as firm or worker characteristics (such as the industries that multinationals work in or the pre-existing abilities of their employees). The higher wages paid by multinationals are attributed to their larger size, greater use of capital and intermediate products — factors that increase employee productivity and, hence, wages.

Furthermore, there is evidence that multinational firms, on average, offer substantially greater training to employees than local firms do, which may be the reason for their relatively higher wages. Finally, those who leave multinational firms for local firms in the same industry have positive spillover effects (meaning that they increase productivity in their subsequent jobs) that remain after adjusting for firm and worker characteristics, possibly as a result of their training and experience.

The apparel (“sweatshop”) industry is no exception. Despite the highly negative press coverage, wage and safety standards in foreign-owned sweatshops are, on average, higher than those of local corporations, and higher than that of average per capita income (in 9 out of 11 studied developing countries including Indonesia, Vietnam and Bangladesh) at just 50 working hours per week. In some countries, such as Nicaragua and Honduras, sweatshop jobs earn a poor individual over 5x that of the average per capita income. That is, when poor workers in developing countries voluntarily enter into contracts with a multinational corporation, despite how lowly paid they appear to someone living in a developed country, they are usually doing so because such a job is better than any other option they have.

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Apparel industry wages as a percentage of average national income, according to hours per week, in 10 developing countries. Source: Powell and Skarbek (2006).

In spite of this evidence, some activists suggest that there should be a global living wage or global safety standards, below which nobody should be employed, because to do so would be undignified. This view is also endorsed by much of the general public.

The eradication of poverty is a very important goal — and most people including myself think extreme poverty is the most serious global issue — but we need to make sure that our good intentions are directed effectively and do not lead us to support policies that hurt people they aim to help.

Unfortunately, many forms of anti-sweatshop campaigning (minimum living wages, national occupational standards, etc.) may be counterproductive, as the economist Benjamin Powell describes:

“Such standards do nothing to make workers more productive. The upper bound of their compensation is unchanged. Such mandates risk raising compensation above laborers’ productivity and throwing them into worse alternatives by eliminating or reducing the demand for their products. Employers will meet health and safety mandates by either laying off workers or by improving health and safety while lowering wages against workers’ wishes. In either case, the standards would make workers worse off.”

Conversely to their intentions, if such policies were set at standards high enough to affect higher-paying sweatshop jobs in developing countries, they would unnecessarily harm a large proportion of lower-earning workers by raising small businesses’ costs high enough to force them to shut down.

In summary, there are several reasons to be cautious of anti-sweatshop campaigns:

  • Several campaigns reduce demand for products made by low-income individuals in multinational corporations (and hence, their employment or compensation).
  • The presence of multinationals results in increased economic growth, a reduction in poverty and improvement of wages and skills of low-income individuals in developing countries.
  • Progress in improving living standards in developing countries is gradual — but would be slower if some popular suggestions of import and labor regulations were implemented.

This does not mean that all anti-sweatshop campaigns are misguided, nor that we need to be complacent, passive observers of people living in extreme poverty, nor that we should support any or every corporation. Some multinationals have affiliates that are reported to have genuinelyseverely abused their workers — these are appropriate targets for anti-exploitation campaigns.

In general, however, we could support more effective, positive frameworks by which people around the world can permanently escape poverty. As with all public policy, it is important to remember that what matters most is better outcomes — that it’s not higher safety standards that are important, but higher health and safety outcomes.

Knowing that some current anti-sweatshop campaigns produce harmful outcomes, we can look to other possibilities that produce our intended outcomes through other means. Some possibilities believed to improve these outcomes include: the reduction of trade and immigration barriers, the advocacy for fundamental civil liberties in developing countries, and increased governmental transparency or reductions in other barriers to competition. Finally, we could also support for high-quality, cost-effective charities and direct donation to support poor individuals in developing countries, to help them gain the skills necessary to work their way up into better-paying jobs. Whatever the solution, we must make sure to not hurt the people we aim to help.

Saloni D

Saloni is a recent graduate of biomedical science in neuroscience and mental health with business management, and is now pursuing a masters degree in behavior genetics. In her free time, she likes to watch old movies, take absurdly long walks through London and eat doughnuts.
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Saloni D

Saloni is a recent graduate of biomedical science in neuroscience and mental health with business management, and is now pursuing a masters degree in behavior genetics. In her free time, she likes to watch old movies, take absurdly long walks through London and eat doughnuts.

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