Safety preferences

Economists know a few things. Among the things I think we know:

• People generally require compensation to take on a known risk of death or injury: safety is a good for most people;
• As people get richer, they require more compensation to take on a risk of given size: safety is a superior good;
• Risk-tolerance is heterogeneous across individuals, and not simply because of differences in income: some people are better able to manage risks or incur fewer psychic costs in thinking about downside costs of risk.
• Observations that some individuals engage in a risky activity for little compensation could be evidence that they are poorly informed, or it could be evidence that they have a high tolerance for risk.

Matt Yglesias argues that we should avoid policy overreactions to the recent and tragic factory collapse in Bangladesh. We expect more on-the-job deaths in poorer countries even in cases where there is perfect knowledge among workers about risks; poorer workers prefer total compensation bundles with higher monetary income and fewer on-the-job amenities like safety.

Bill Kaye-Blake takes issue with Yglesias's analysis. He writes:

It may look on the surface like Yglesias is being all ‘realist’ and ‘sensible’, but in fact he gets the economics wrong. He forgets three things:

• preferences are only half the story. The other half is the choice space in which preference can be expressed. It is the combination of preferences and available options that lead to the choices made. Ascribing the choices to preferences alone gets the theory wrong; one can just as legitimately point to the limited options

While that's true, surely the options available are endogenous to local effective preferences. If effective demand among local workers were for a total compensation bundle that included more safety and lower wages, and if it were no more expensive for the firm to provide that kind of bundle than to provide the less-safety-higher-wages bundle, they'd wind up providing it. It could take a while - if safety is largely contingent on prior fixed plant investments and if plants have a relatively long life, it would be hard for workers to change things at existing factories. But it would also be hard for anybody else to effect that change.

• the market theory that Yglesias uses to underpin his ideas — that there are market transactions deciding the prices of garments and safety — assumes freely available and perfect information. A large economic literature then explores the impact of relaxing that assumption. But that’s the post-grad course, and Yglesias is stuck in 101. Here’s the thing: we could make it perfectly obvious to Western consumers how their garments were made, what the working conditions were. Then we could talk about a market solution. Let me put it another way: is Burger King going to launch a horse-burger because people were buying them before they found out what was in them?

Let's take the case of imperfect information among workers first as I think it's the more serious one. Suppose that workers trust in that the existing government regulations around safety form a binding floor on the level of safety that a firm can provide, but that the owners chisel by bribing officials in ways not noticed by workers. Then, the workers are effectively accepting a lower total compensation bundle than they thought that they were being provided. Bill links to plenty of evidence that the factory owners in this case were up to all kinds of shenanigans.

What do we expect might work in this state of the world?

• Asking Bangladesh to increase its building standards is unlikely to have much effect where the quality of governance is too poor to enforce the current standards; asking Bangladesh to improve its generalised quality of governance may not be far from asking for unicorns. Improved governance would be great, but we have no good general handle on how to achieve that.
• Local workers will discount existing building codes and government regulations and perhaps demand more direct and credible signs that the expected level of safety is being provided. I'm not here suggesting that a local worker can go up to the company owner and demand things; rather, a factory opening up next door showing with credible evidence of stronger standards will hire away workers where workers have effective demand for safety. 
• This could yield a market in external certification, but it could be tough to establish. You need somebody that the workers trust to provide the certification, who is competent to do it, and whose officials are less corruptible than state workers. It's far from impossible, but I'm not sure it's easy.
• If local certification options don't pan out, this is actually a spot where Western retailers could help out. Western retailers can enforce standards among manufacturers through spot-checks and the like, and they're credible. But what should they enforce?
• If you think that the main problem is that owners lie to workers about existing safety standards but that workers are otherwise competent to choose safety-salary bundles, you want the retailers not to be enforcing minimum safety floors but rather to be providing accurate information to workers about real safety risks and about safety conditions in other potential places of employment. Putting in minimum safety standards risks worsening the lot of workers who legitimately would choose less safety and higher salaries.
• If you think that the main problem is that poor foreign workers cannot adequately judge safety risks, you want the retailers to put in a minimum safety standard using their best estimate of what well-informed poor workers would choose. I worry that these kinds of standards wind up instead embedding a lot of Western wishful thinking; I also worry that rich country lobbyists have strong incentive to push for standards that work to raise their rivals' costs rather than to improve the lot of workers. 

I'm not sure that there's any particular net market failure caused by imperfect information among Western consumers. My basic model has two offsetting effects: consumers don't really know what goes into the sausage, but they're also prone to believe that banning sweatshops leads to kids in schools rather than kids in malaria-ridden fields or in garbage dumps. It is way way easier to get Western consumers outraged about working conditions in third world countries than it is to get them to think hard about policies that might do more good than harm. And first-world manufacturers and unions are quick to jump in with entrepreneurial policy proposals that look nice while raising rivals' costs.

And so I worry about the risk of making workers in third world factories worse off as they see things. I'm sure Bill worries about that too; we may just be disagreeing on how far above the ideal floor any minimum-standards campaign would wind up pushing things. 

Sweatshops revisited

Last year I took the "pro" position in favour of sweatshops in a debate hosted by EconSoc; my opening salvo posted here.

Steve Landsburg today points to a very nice old piece from the New Internationalist on the costs of US bans on importing goods produced by child labourers.

No. No photographs. Saleha is scared. Many a time she has hidden under tables, been locked up in the toilet, or been sent to the roof in the scorching sun for two or three hours. It happens whenever foreign buyers enter the factory. She knows she is under-age, and doesn’t want photographers messing things up – she needs the job. The whole industry has suddenly become sensitive. Owners want their factories open. The workers want their jobs. The special schools for former child labourers want aid money. No photographs.

Neither Saleha nor any of the other child workers I have interviewed have ever heard of Senator Tom Harkin. All they know is that pressure from the US, which buys most of Bangladesh’s garments, has resulted in thousands of them losing their jobs at a stroke.

According to a press release by the garment employers in October 1994: ‘50,000 children lost their jobs because of the Harkin Bill.’ A UNICEF worker confirms ‘the jobs went overnight’.

The controversial bill, the ‘Child Labor Deterrence Act’, had first been introduced in 1992. A senior International Labour Organization (ILO) official has no doubt that the original bill was put forward ‘primarily to protect US trade interests’ – Tom Harkin is sponsored by a key US trade union, and cheap imports from the Third World were seen as undercutting American workers’ jobs. ‘When we all objected to this aspect of the Bill,’ says the ILO official, ‘which included a lot of resistance in the US, the Bill was amended, the trading aspect was toned down, and it was given a humanitarian look.’ It was when it was reintroduced after these amendments in 1993 that the Bill had its devastating impact in Bangladesh.

The child workers themselves find it particularly hard to interpret the US approach as one of ‘humanitarian concern’. When asked why the buyers have been exerting such pressure against child labour, Moyna, a ten-year-old orphan who has just lost her job, comments: ‘They loathe us, don’t they? We are poor and not well educated, so they simply despise us. That is why they shut the factories down.’ Moyna’s job had supported her and her grandmother but now they must both depend on relatives.

Other children have had no alternative but to seek new kinds of work. When UNICEF and the ILO made a series of follow-up visits they found that the children displaced from the garment factories were working at stone-crushing and street hustling – more hazardous and exploitative activities than their factory jobs.

Would that there were a hell and that it judged politicians by their effects rather than their intentions.

Assorted updates

• I'd previously noted the sad case of Janet Moses, drowned by her family in a ritual exorcism. The jury verdicts are now in: one uncle and four aunts found guilty of manslaughter; three others acquitted. All acquitted for the similar (but not fatal) treatment accorded to a 14 year old girl in the same incident. The TV news reports howls of outrage from the public galleries; the audience seems to have thought all should have been acquitted. We'll see what the Court deems appropriate for sentence.


• Another update on ticket scalping, from Slate:

  But even economists who think that tickets are badly mispriced can have problems with ticket scalping. In his Offsetting Behavior blog, economist Eric Crampton discusses another theory of scalping in a post that's probably the only essay in which you'll see an economist turn to an analysis by Trent Reznor of the Nine Inch Nails. Crampton argues that one of the reasons that scalping persists might be because venue operators find shady ways to share in the profits at the expense of fans and performers. Crampton notes that Reznor gives one very good piece of evidence that there's something shady going on here: Ticket sellers could end scalping tomorrow by just printing names on the tickets.

  Surely other economists have turned to Reznor before. No?


• I'd previously argued against two Canterbury philosophers in defense of sweatshops; here's a nice argument from a U San Diego philosopher in favour of sweatshops.

  Abstract:
  This paper argues that a sweatshop worker's choice to accept the conditions of his or her employment is morally significant, both as an exercise of autonomy and as an expression of preference. This fact establishes a moral claim against interference in the conditions of sweatshop labor by third parties such as governments or consumer boycott groups. It should also lead us to doubt those who call for MNEs to voluntarily improve working conditions, at least when their arguments are based on the claim that workers have a moral right to such improvement. These conclusions are defended against three objections: 1) that sweatshop workers' consent to the conditions of their labor is not fully voluntary, 2) that sweatshops' offer of additional labor options is part of an overall package that actually harms workers, 3) that even if sweatshop labor benefits workers, it is nevertheless wrongfully exploitative.

Sweatshops

EconSoc held a debate between a couple of economists and a couple of philosophers on the merits of sweatshops. My opening salvo is copied below, though the actual delivery truncated things somewhat. Enjoy!

Sweatshops and the Nirvana Fallacy.

I’m a big Simpsons fan. A few seasons ago, Lisa complained about how mean Bart was to her and wished he could be nicer and not wreck her stuff and stick up for her at school. She then shook her head and sighed that she might as well wish for a pony while she’s at it. In other words, wishing her brother to be nicer can’t make it so.

I think everyone here would prefer a world in which everyone is richer, where all kids have opportunities at least as good as those that kids here in New Zealand have, where nobody has to work more than an 8 hour day to make a living. So when we look out into the world and see places where folks no less morally worthy than ourselves work under worse conditions than us for less rewards, we recoil. And we want to make things better. It’s laudable that we care about others: Adam Smith, as much moral philosopher as economist, called it the sympathetic principle. We imagine ourselves in the position of the other and we make assessments on that basis. But we make a mistake when we imagine ourselves in the place of a sweatshop worker in Southeast Asia or Central America and imagine that, but for the existence of oppressive sweatshops, these folks could enjoy a standard of living like ours. We’re comparing their conditions with our relevant alternatives, and reasonably finding them wanting from that standard, when we ought instead to be comparing their conditions to their relevant alternatives. Comparing their conditions with our relevant alternatives, well, we might as well be wishing for ponies. Or, as economist Harold Demsetz put it, we’re committing the Nirvana Fallacy.

Harold Demsetz warned in a beautiful piece of economic writing back in 1969 against what he called Nirvana Theorizing. He said there that we can’t say markets fail just because they deliver outcomes that we don’t like; rather, we have to compare the outcomes of markets to real-world achievable alternatives. We can’t just assume Nirvana on the other side of the scale. And, most of the arguments against sweatshops effectively assume Nirvana on the other side: if only we were to ban sweatshops or, more realistically, impose bans on the import of products produced by sweatshop labour, the employees would suddenly be freed to pursue fulfilling careers or to go and get that Bachelor’s in Cultural Studies that they’ve always wanted. Their kids would be in great schools provided by their governments instead of working in the factory with their parents. And they’d all have ponies. It’s only the evil sweatshops that are keeping them from achieving their dreams. If only it were that easy. For proper comparative institutional analysis, we really have to look at how working in a sweatshop compares with what else these workers could be doing.

Now, we could take a strong aprioristic argument and say that the very fact that workers in these countries choose working in the factories means that factory work has to be better than their next best alternative as they judge it. And, barring cases of prison-labour in China, we’d be right in doing so. Some folks could raise arguments about parents forcing their kids into that kind of work, but they’d have to be making the assumption that parents in these countries don’t care much about their kids and are choosing options that make the parents better off and the kids worse off: it’s more than a little paternalistic of us to think that we care more about other peoples’ kids than those people do themselves. But some folks could make that argument about child labour in sweatshops.

Instead of relying on the aprioristic argument, let’s look at some actual evidence. What are the relevant alternatives for folks choosing to work in sweatshops? Well, some economists have actually done that. Steve Hickson will be talking about a few such studies in a few minutes; I’ll highlight a few others. Benjamin Powell was a classmate of mine in grad school. He’s recently finished some research looking at standards of living associated with sweatshop work. Powell looked through the US media for reporting on exploitative sweatshop labour. He found 43 cases mentioned. He took the wage rates reported in those very articles and compared them to the average national income per worker in the countries where the factories are located: In 9 of the 11 countries, average reported sweatshop wages – the wages reported in the stories complaining about the sweatshops -- matched or bettered national average wages for a 70 hour work week. In countries like Cambodia, Haiti, Nicaragua and Honduras, “sweatshop” wages were more than double the country’s average income. Powell then compared average wages in the apparel industry with average national wages and again found that workers earning the average wage earn more than the average national income at even a 40 hour work week for 8 of 10 countries where he could find data: 9 of 10 on a 50 hour week and 10 on 10 for a 70 hour week. Recall that in countries like Bangladesh, about 80% of the population lives on less than $2 per day.

So, while the wages paid in sweatshops are pretty poor by our standards, they’re very good by comparison to other alternative employment that folks in those countries could get. But what about other working conditions? 70 hours a week sounds like a lot: surely the workers would be happier working only 40 hours per week. Nicolas Kristof and Sheryl WuDunn received a Pulitzer Prize for their reporting on China. They report in the New York Times Magazine on sweatshops in China. They there find folks very happy to be working 10 hour days, and finding it a plus that the factory that they work at allows them to work seven days.

“The others we talked to all seemed to regard it as a plus that the factory allowed them to work long hours. Indeed, some had sought out this factory precisely because it offered them the chance to work more.”

In one case, western pressure to reduce work hours resulted in riots and protest at the company: people wanted to earn more money to improve their kids’ lives and were furious at being denied the opportunity. Many of the kids currently employed in sweatshops would otherwise be employed in agriculture, working on small farms with high risk of malarial exposure and even worse working conditions than those found in the factories. For others, the relevant alternative is even worse than the farm: I’ll come to that shortly.

Some folks argue that they don’t want to ban sweatshop imports, they just want to mandate that imported products be allowed only if the sweatshops live up to certain labour conditions. But requiring higher standards raises the total costs of labour in third world countries: some factories will employ fewer people, and others will shut down. It’s no surprise that the most vocal advocates of high labour standard imposition are western labour unions who don’t really care about poor people abroad but instead just want to price the competition out of business. A few workers who get to keep their jobs will be made better off by these regulations, but the folks who are currently working in the sweatshops are already the winners. The losers are the folks who never get a chance to work in a sweatshop.

More recently, Kristof’s been reporting on the conditions in a garbage dump in Phnom Penh. What’s that got to do with sweatshops? Well, you probably didn’t know it, but lots of people live and work in garbage dumps in third world countries, scavenging through the trash looking for scraps of metal or old plastic cups that they can sell to recyclers. It’s terrible work. Writes Kristof this January in the New York Times:

“Another woman, Vath Sam Oeun, hopes her 10-year-old boy, scavenging beside her, grows up to get a factory job, partly because she has seen other children run over by garbage trucks. Her boy has never been to a doctor or a dentist, and last bathed when he was 2, so a sweatshop job by comparison would be far more pleasant and less dangerous.

I’m glad that many Americans are repulsed by the idea of importing products made by barely paid, barely legal workers in dangerous factories. Yet sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty. At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade.

When I defend sweatshops, people always ask me: But would you want to work in a sweatshop? No, of course not. But I would want even less to pull a rickshaw. In the hierarchy of jobs in poor countries, sweltering at a sewing machine isn’t the bottom.”

Kids are born, live, and die in the garbage dumps, and know no life except walking barefoot through rubbish looking for scraps. For these folks, work in a sweatshop is a dream. However bad conditions in the factories sound to us, when we compare them to our comfy offices, they’re almost infinitely better than self-employment in the garbage dumps. And, the garbage dump is the relevant alternative for a lot of folks. For others, it’s worse. Radley Balko reports on some of the costs of anti-sweatshop protests. One German company bowed to popular pressure and laid off 50,000 child garment workers in Bangladesh. Some of you would have cheered on hearing it. But when Oxfam followed up, they found that thousands had turned to prostitution, crime, or starved to death. In 1995, anti-sweatshop protesters led Nike, Reebok and others to close down soccer-ball and other garment manufacturing plants in Pakistan; mean family income dropped considerably; University of Colorado economist Keith Maskus found that many of the child labourers were later found begging or getting bought and sold in international prostitution rings. What happens when we talk about legislation banning the import of goods produced using child labour? Let’s look at the 1997 UNICEF report that details the effects of the Harkin Bill.

“The Harkin Bill, which was introduced into the US Congress in 1992 with the laudable aim of prohibiting the import of products made by children under 15, is a case in point. As of September 1996, the Bill had yet to find its way onto the statute books. But the mere threat of such a measure panicked the garment industry of Bangladesh, 60 per cent of whose products — some $900 million in value — were exported to the US in 1994.8 Child workers, most of them girls, were summarily dismissed from the garment factories. A study sponsored by international organizations took the unusual step of tracing some of these children to see what happened to them after their dismissal. Some were found working in more hazardous situations, in unsafe workshops where they were paid less, or in prostitution.”

We imagine that if we could only ban sweatshops, we’d be putting kids into school. We’re deluding ourselves. Every little bit of smug satisfaction you get by working to ban sweatshop imports, or by turning your nose up at products produced in those factories, comes at a cost: the marginal employee in a sweatshop is sent back to his next best alternative. UNICEF reports that only a tiny minority of child labourers work in the export sector: most hawk goods on the streets, engage in local production, or work at rag picking. Conditions in the export factories are better. If you’ve been working to ban imported products produced by child labour or in sweatshops, you are buying warm fuzzy feelings at the cost of pushing some of the world’s most vulnerable children into even worse conditions: the garbage dump, begging, child prostitution and starvation. It’s no good to complain that that isn’t what you wanted: you’re just wishing for ponies. It’s no good to complain that foreign governments should be ensuring that every child is in school: they can’t afford it, and the most we can do is contribute to charities that subsidize local education in third world countries. It’s no good to complain that foreign countries should crack down on child prostitution: of course they should, but they haven’t the resources. The best we can do is assist charities that work to get kids off the streets. If you care about poor children in the poorest part of the world, don’t work to make their lives worse. Work for the charities that are out there trying to help these kids, like Canodia – they’re an organization that runs orphanages for kids rescued from the garbage dumps. If you’re working in the anti-sweatshop movement, consider such donations as an offset for the likely effects of your activism, because the likely effects of your efforts is to push kids into the garbage dumps, or worse.

It’s easy to imagine perfect worlds where there aren’t any sweatshops. But getting rid of sweatshops in the world we have makes the families that work there worse off. At minimum, we should do no harm. Working to ban sweatshops does harm. Stop it.

Sweatshops debate

Together with Stephen Hickson, I'm tomorrow debating a couple of folks from the philosophy department on the merits of sweatshops. I'm of course defending the argument that sweatshops are far better than the real world relevant alternatives that sweatshop workers face. If interested and in Christchurch, it's on at 1:00 in Commerce Room 002.UPDATE: C-block lawn!

The debate is hosted by EconSoc. I'll post my opening comments post the debate.

Update: Full text of my opening remarks now available here.