Is it ethical for Western companies to pay low wages when they move their factories to developing nations?

Contributed by DL (high school student)

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About John Hooker

T. Jerome Holleran Professor of Business Ethics and Social Responsibility Tepper School of Business Carnegie Mellon University

One response »

  1. John Hooker says:

    This is a huge issue, but perhaps we can make some progress in a short discussion. First, we have to take care of some practical matters. Wages are normally set by a local factory operator, not by the Western company that sources from the factory. Few factory managers want to run a sweatshop, and many have a sense of loyalty to their workers. However, competition is fierce, because Western firms are looking for the lowest possible price. Managers therefore cut wages as necessary to avoid losing their contracts and laying people off.

    The Western companies who source from low-wage factories are likewise constrained. They may argue that if they pay suppliers higher than market price, competition will force them out of the market. Or even if not, their lower profitability will result in a decline in stock values and an eventual bankruptcy or acquisition by a more profitable firm.

    To pose the dilemma, we have to set up a scenario in which the company has a realistic choice. Let’s suppose that ABC Apparel sources fashionable items from a factory in a low-wage economy. Most of ABC’s expenses are for design, distribution and celebrity endorsements, so that only about 3% of the garment price goes to the factory. ABC is considering whether to double its payment to the factory on the assurance that the additional funds will be passed on to workers in some form. Economists point out that the factory will be deluged with employment applications, and the labor market must clear somehow. Let’s suppose the factory deals with this by investing some of the money in good working conditions, and by hiring on the basis of demonstrated skill level and a certain minimum age (i.e., older than school age). ABC’s profitability and stock price will fall somewhat, but not enough to endanger the business. Does ABC have an obligation to go through with this?

    The utilitarian choice is clear. The workers will gain more from higher wages than stockholders and other parties lose. Child labor will be reduced, and workers who are not hired will be incentivized to develop their skills, which could result in higher productivity in other factories.

    However, we must check whether the utilitarian choice passes other ethical tests. A popular argument is that it does not, because it ignores fiduciary duty to maximize shareholder value. However, as always in such cases, the prior question is whether the owners of the company (i.e., the stockholders) themselves have an obligation to raise wages in this situation. They clearly do, on utilitarian grounds, because there is no ethical duty to the contrary. Given this, it is unclear why the company managers are required to obtain a level of profit for owners that would be unethical for the owners to obtain if they ran the company themselves.

    One may argue at this point that if the goal to to increase total utility, raising wages above the market rate is not generalizable. Economists have demonstrated that more wealth is generated in the long run if everyone responds to market signals. So if companies were to ignore market signals for wage rates, the goal of increasing overall utility would be frustrated.

    However, even if we suppose that neoclassical economic equilibrium models are based on realistic assumptions, no one is suggesting here that market signals for wages be ignored in general. Part of the rationale for raising wages is that the workers are in a low-wage emerging economy, and higher wages are feasible for the companies involved. We need more than a hand-waving argument that a general practice of raising wages somewhat in this context would reduce overall utility, particularly since common sense suggests otherwise. Until such an argument is forthcoming, raising wages somewhat seems generalizable.

    I conclude that raising wages somewhat in the type of scenario I have outlined is ethically obligatory. One might claim that this scenario rarely occurs in practice. OK, if a given company’s situation is not like this, then my conclusion doesn’t apply. However, if some practical way can be found to improve wages and working conditions at least to some extent, then the company should do so.

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