Econ take home exam question #2

Are sweatshop workers exploited or are they rational maximizers?

Yes, sweatshop workers are exploited and, yes, they are rational maximizers. Unfortunately, exploitation and rational maximization are not mutually exclusive states. The deplorable working conditions in China as described by Jasper Becker’s article Sweatshop Hell for China’s Toy Maker’s Worse Than Ever (The Independent, Dec 2002), are possible, at least in part, because there is a ready and willing supply of labor and a large demand for that labor.

Pressures to keep production costs as low as possible are being applied not just by the corporations that are setting up shop in these areas, but also by the consumers that buy their goods. A competitive marketplace in a global economy can be a double-edged sword. Our desire for low cost goods and the necessity for corporations to remain profitable and competitive create a system which feeds upon itself.

We desire cheaper goods. Companies need to make a profit in order to stay in business. In order for companies to meet the marketplace demand for lower cost goods and at the same time remain competitive and viable, it may become necessary to produce goods overseas, where labor costs are cheaper. This shift of manufacturing abroad translates into a loss of manufacturing jobs in America. The newly unemployed workforce is often forced to take significantly lower paying jobs in the service industry. This reduction in income increases the desire (and sometimes necessity) for lower cost goods.

However, these newly created jobs in China have a positive impact on that country’s population as a whole. Yes, the wages may be low compared to what the identical job pays in America, but often sixty cents a day represents a siginificant improvement in wages prior to foreign companies moving in. There are cases of abuse. Sub-contractors who supply parts and materials to these companies may not pay a decent wage (in some cases they may pay nothing at all), however, history has shown that these abuses, while abhorrent, tend to extinguish themselves in time. If an employer will not pay acceptable (or any) wages, eventually the workforce will no longer work for that company.

Change is painful, and not always pretty. Capitalism and a free market economy, in my view, tend to make living conditions better overall for most people. However, as one group benefits from the relocation of jobs and factories, another group suffers. Ultimately, a free and open market levels the playing field - increasing the welfare of some of those who are poorest and, at the same time, decreasing that of some of those who were well off in the previous system.