Tuesday, September 22, 2009

Sweatshop equilibrium

Westerners complain about sweatshops in Asia for two reasons: they produce at much lower labor costs, thus undercutting the Western labor force; and the labor conditions are inhumane due to long hours and poor environment. One answer to these critics is that without those sweatshops, the local labor force would not have jobs and that eventually conditions and wages will improve, as it has happened during the Industrial Revolution in the West.

Nancy Chau does not seem to share this vision as she shows sweatshop conditions could be permanent due to an unfortunate outcome in a multiple equilibrium. Think of the search and matching framework used nowadays to study the labor market. People need time to explore and find new jobs. But this time is not available in a sweatshop. In other words, on-the-job search is impossible and workers end up in a situation akin to slavery. The way out? Enforce shorter hours, even if this means temporarily reducing the workers welfare. The latter may oppose it, but it is only because they do not know what their outside options are.

The scenario I describe above is only one of several possible ones, but it is somehow reminiscent of European labor history. But Chau shows that there are also equilibria where an economy can grow out of sweatshop conditions without intervention. The big question is then: in which equilibrium are Asian sweatshops currently?

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