I will argue that unregulated sweatshops lead to the greatest overall societal welfare. First, I will discuss “The Ethical and Economic Case for Sweatshop Regulation” by Mathew Coakley and Michael Kates; they assert that unregulated sweatshops harm workers. Then, I will discuss the short-run and long-run impacts of regulation. Finally, I will show how the long-run net benefits of an unregulated sweatshop sector provide greater overall societal welfare than the long-run net benefits of a regulated sector.
Coakley and Kates argue that unregulated sweatshops are harmful to workers (553). Every social and economic practice has costs and benefits associated with it (555). To assess the impacts of regulation, Coakley and Kates compare the expected costs and benefits in terms of human welfare (554). Increasing wages of sweatshop workers will have a primary consequence and several potential secondary consequences. Coakley and Kates assert that “the certain and primary consequence of increasing sweatshop worker wages is, of course, that sweatshop workers will have more income” (554). The first potential secondary consequence is that the price of certain goods may increase, “depending on both efficiency effects and its share of the total cost” (554) The second potential secondary consequence is that “profits for sweatshop owners might decrease” (554). Thirdly, employment rates among non-sweatshop workers may rise due to sweatshop workers spending their additional disposable income on local goods and services (554). Fourthly, if prices of goods increase and consumption decreases accordingly, employment rates among sweatshop workers may decrease (555). A 2004 study found that a 100% increase in sweatshop wages in US and Mexican firms would result in a price increase of 2% to 6% (555). Coakley and Kates use this data to determine that the gains from workers having higher incomes would outweigh the losses associated with some sweatshop workers losing their jobs due to increasing operating costs (555). Furthermore, if some factories relocate due to increasing wages, the welfare losses are offset by the welfare gains in other countries that operations move to (555).
Coakley and Kates identify that all economic policies create benefits and costs. Increasing wages has the potential to create benefits from the increased income that workers receive and then spend; this can boost the local economy and labour demand. Coakley and Kates, however, fail to accurately assess the short-run and long-run costs associated with raising wages.
In the short-run, those that are fired as a result of increasing wages have their income drastically reduced or eliminated entirely. Therefore, these people will spend less in the local economy. Moreover, the workers that are fired enter the labour market in search for a new job. This increases the supply of labour which can have two potential negative impacts. A higher labour supply can drive down wages in non-sweatshop jobs while also decreasing the employment opportunities available to non-sweatshop workers.
Regulations like increasing wages do not help in eliminating extreme poverty in the long-run. Economic development, however, is a key factor that eventually leads to the minimization of extreme poverty. Living standards in a nation can generally be assessed using the amount of physical capital, level of technologies, and quality of human capital. Sweatshops can assist nations in all three areas. Firstly, physical capital increases because of the financial investments associated with sweatshops. Secondly, newer production technologies, relative to existing technologies, are brought to the nation. Thirdly, sweatshops provide more opportunities to improve human capital in comparison to other employment that is usually available in developing nations, like agriculture or service work. Increasing wages will provide short-run benefits, primarily for those who remain employed in sweatshops, but the fired workers will not build as much human capital while working in non-manufacturing jobs as they otherwise would have. While the short-run welfare may be improved, long-run welfare is hindered by regulations.
Multiple nations can serve as examples of the positive economic development that follows unregulated sweatshop production. In the 1950s, the nations with the most sweatshop production were Taiwan, Hong Kong, Singapore, and South Korea. Each of these nations adopted policies that supported economic freedom rather than regulation, and each nation was able to establish first-world living standards within a generation (Powell, 2014). More recent examples include China and Bangladesh. Between 1981 and 2010, China experienced massive urbanization as 160 million citizens moved to cities. The resulting impact was a decrease in extreme poverty from 84% in 1981 to just 12% in 2010 (Wall Street Journal, 2013). Lastly, Bangladesh’s sweatshop industry has been growing steadily and the nation more than doubled its GDP per capita from $510 in 2000 to $1093 in 2017 (Trading Economics, 2019).
A potential objection is that economic development can still occur in nations with regulated sweatshop industries, albeit at a slower pace than unregulated economies. However, higher operating costs and regulations mean that fewer companies are willing to enter the market and will instead opt for unregulated markets in other developing nations. Moreover, some companies will choose to relocate their current operations rather than complying with regulations. This will lead to low or no increases in physical capital and decrease the amount of new technologies that are introduced. These two factors combine to hinder the development of human capital, which in turn hinders long-run economic development and wage growth.
One could also contend that the companies will still be entering markets in other developing nations and this will eventually lead to economic development in those nations, improving overall societal welfare. However, relocation means that the process of economic development is restarted in the new nations that operations move to. This means that more time needs to pass before a developing nation prospers through economic development and establishes first-world living standards. Additionally, if the unregulated nations that companies relocate to decide to implement regulation at any point, this process of relocation and restarting economic development will simply continue with no developing nations experiencing long-run prosperity through the minimization of extreme poverty.