Compared to What? The Counterfactual to Sweatshops in Developing Countries

One of the most tiresome, useless debates in economic policy is over the merits of sweatshop employment in low income countries.  On the one side we hear cries of Exploitation! which are certainly correct; these are highly exploitative operations, with rock-bottom wages and autocratic and dangerous working conditions.  On the other we hear that this is the bottom rung on the grand ladder to riches, and the very fact that there is demand for these jobs shows they provide desperately needed income.  Most economists line up in the second of these camps, since the default assumption is that anything people voluntarily agree to, even a sweatshop job, comes with a gain from trade.

The problem is that the question is wrongly posed.  Once we accept that right and wrong depend on the consequences, it all hinges on the counterfactual: what are we comparing the sweatshops to?  For economists, the implied alternative is nothing—no jobs at all.

But why should it be all or nothing?  What about third options that bring economic opportunity but don’t crush the body and spirit?  The histories of countries that are now developed have seen countless struggles for alternatives to love it or leave it, including government regulations, public support for unions and financing for cooperatives.  Why shouldn’t the same alternatives be on the agenda in countries just entering into industrialization?

Finally we have a careful study using experimental methods that compares the outcomes of sweatshop employment to a plausible alternative, in this case a program that provides cash grants and training for entrepreneurship.  (A summary is here.)  The setting is Ethiopia, and the researchers persuaded five companies to use random selection to pick employees out of a larger pool of applicants.  So there were three study groups, people who applied for a sweatshop job and got one, people who applied and got the alternative program, and people who applied and got nothing.  They were all followed for about a year to see what happened.

The ones who got jobs were not better off than the ones who got nothing, perhaps because of spillover effects in the local area from the new factories.  But the clear winners were the ones who got the alternative treatment; their income shot up by a third compared to the others.  Meanwhile, the negative health consequences of sweatshop work were real and, from that standpoint, left the job-takers in the worst position of all.  Incidentally, the fact that sweatshop jobs increased workers’ health risks without increasing their income violates the common economic assumption of compensating wage differentials, but that doesn’t come as a shock to me.

The moral of the story is not that no manufacturing companies should set up shop in poor countries or that entrepreneurship support is always the way to go, but simply that we need to consider a range of alternatives.  And the economists’ assumed alternative to sweatshops, no new economic opportunities at all, is probably going to be the worst of them.

Incidentally, the header is intended to draw your attention to a long overdue remake of the classic antiwar party song “Compared to What?” by Terence Blanchard.