Fair Labor Standards For Some
Currently, MIT’s administration is considering joining the Fair Labor Association and the Workers’ Rights Consortium. These organizations inspect factories that produce apparel for their members, trying to make these factories adhere to certain labor standards. In addition, the administration is considering its own code of conduct for its contractors. Some elements suggested for the code are a living wage, voluntary overtime, increased health and safety regulations, and a non-discrimination policy. This issue has been the subject of intense discussion but the discussion has not included or, in the case of Stephanie Wang’s article “The Inhuman Fabric” [Feb. 22] has willfully ignored, the economic consequences of such requirements.
This is irresponsible. If people are going to create policy affecting the poor of developing countries, they should study the consequences of that policy. Generally when economists explains the economic consequences of a specific action, they use abstract economic reasoning. I will do a bit of that later. Fortunately, there is very recent empirical evidence on the economic consequences of imposing a living wage requirement, so let’s look at that first.
You may not know, but many cities in the United States have passed laws requiring employers to pay a living wage. In response to its living wage policy the city of Santa Monica conducted a survey of employers. Forty percent of restaurants said they were very likely to lay off workers, as did nearly half of the hotels. Seventy percent of the hotels said they would hire fewer workers in the future. David Neumark, a professor of economics at Michigan State University, used data on cities which enacted living wages and concluded that the living wage decreased employment.
This empirical evidence indicates that requiring MIT’s suppliers to enact a living wage will result in some workers losing their jobs. This is not necessarily a reason to reject the living wage requirement. It is of course possible that the lives of workers who keep their jobs improve enough that we are willing to live with a few workers losing their jobs. If one is to take this position, I believe the only appropriate cost of action is to, in the short term, admit that you are sacrificing the well-being of a few for the good of the many, and, in the long term, fight for some type of social structure to ensure that unemployed workers are able to receive the basic necessities of life.
Perhaps the empirical evidence is not enough to convince you that a living wage and increased labor standards will cause some workers to lose their jobs. So let me give you three reasons why we would expect this result.
First, we can think about the factories as hiring workers in order to make the largest profit possible. Let’s think of a factory that produces clothing apparel. It needs a certain number of workers to be able to produce anything. After that the more you add the more you produce. But given limited space and machines, the production the first additional worker adds will be more than the production the twentieth worker adds and so on. As the firm hires more workers, the value the next worker adds becomes smaller. If the firm is to make the most amount of money possible, it will hire workers until the value of the production the next worker adds is less than the wage the company must pay that worker. If you raise the wage that the company must pay, the company will stop hiring workers earlier. The point where the value of adding an additional worker is less than the new, higher wage occurs at a lower level of employment.
A second reason why employment will be reduced stems from a correction of a common misconception about businesses. Often it is thought that as long as a business is making profit, we can take some of that profit, and as long as we don’t take it all, it will stay in business. This is clearly wrong. Let’s say you have all your money in a savings account that, after inflation, makes one percent interest annually. If we applied the above misconception we would conclude that you wouldn’t move your money because you are making a profit. But, in fact, you are not really making a profit because there are other options for your money, for example a mutual fund, that will make a higher profit. Similarly, a business needs to make enough profit to justify not selling its assets and investing in another industry. When you raise labor costs for a company, you reduce profits. Those firms that were making just enough to want to stay in the industry, now will want to leave. They won’t be employing people in that industry any more, and industry employment will be reduced.
The third theoretical reason is perhaps the most important, because it reveals a powerful harm of enforcing workers’ rights: it is the least fortunate workers who lose their jobs. Imagine a company increases the wages it pays and makes the work environment more pleasant. People previously not willing to work at the company will now be willing to work there. Chances are, these people are more productive workers than the ones currently working at the factory; they were not willing to work at the old company because they were able, because of personal ability, to get better jobs elsewhere. Now given the choice between the more productive workers and their old workers the company will give the new workers jobs and their old workers the boot.
Unemployment of workers is the inevitable economic consequence of enforcing labor standards. It’s unbelievably arrogant and irresponsible to enact a policy and ignore the consequences and their unavoidable harms. However, I do not write to damn fair labor standards. They are a just right that we should fight for. But we must not rest on our laurels and ignore those workers who are harmed by the policy; instead we should fight tirelessly to see that they too are helped.