Regulating working conditions

Posted by Tatyana Deryugina on Jan 30, 2012

Filed Under (Other Topics)

Recently, New York Times ran an article on working conditions in Apple’s factories in China. This article surfaced on my Facebook feed and instead of posting my thought into the crammed comments section, I decided to write a more extensive blog post.

How should we should think about regulating working conditions? The first rule of economics is: if labor markets are competitive, don’t mess with them. What does it mean then to have a competitive labor market? It doesn’t mean that wages are high or “fair”. It doesn’t mean that workers put in 40 hours a week and no more. It means that there are lots of companies and lots of workers. Workers know what the working conditions are like and voluntarily enter into a labor contract. In other words, there is no market power and everyone knows what they’re getting themselves into. The result might be people working 80 hours days for low wages, but if we were to say this was unacceptable, we would be infringing on individual rights to choose for themselves and possibly making those workers worse off.

Even concerns about fairness can have unintended effects. Sure, if we could magically provide everyone with better working conditions, without putting some people out of work and without raising the prices of the goods, no one would be against that. But there’s no such things a free lunch. What is likely to happen if higher standards are imposed is that prices of the product will go up, demand for the product will go down, and some unlucky workers (who were perfectly happy working there before) will end up unemployed. Even if we as a society decide that we don’t mind the first two effects, we probably don’t want the last one.

What if labor markets aren’t competitive? First, workers could be physically coerced into working at the factories. No one thinks slavery should be tolerated. That doesn’t seem to be the case here – from what we can tell, the workers went willingly. However, if the company prevented existing workers from leaving by withholding wages in a way that wasn’t part of the original deal, that could also be a type of coercion.

There is another kind of coercion that deserves serious consideration in this case. Economists have always recognized that monopolies are bad for society. So are its lesser-known cousins – monopsonies. Here, a big firm is able to exercise market power as a buyer. Foxconn is a large employer and it’s plausible to think that it may have the power to depress wages (and working conditions) below what would be the competitive market outcome. China is large too, so it’s not clear that Foxconn is “big enough”, but it’s certainly a possibility.

The second major source of problems here could be biased information. Workers may believe that working conditions or wages are better than they really are when they sign up to work there. If information doesn’t travel well, this is entirely possible. Biased beliefs have to be combined with significant moving or quitting costs, however. Otherwise, workers would simply leave the job once they find out how bad the conditions are. Unfortunately, the article says almost nothing about what the workers believe when they decide to take these jobs.

The NYT piece isn’t the first article on poor working conditions in developing countries and it won’t be the last. There may be lots of reasons to think that, in this case, regulation, better enforcement and public pressure are warranted. But the questions we should be asking are not “Are wages low?” or “Are working conditions dangerous?” or “Would I take this job?”, but whether there are labor market failures that resemble those described above.