David Pogue has a very nice piece about Apple, China, and Foxconn over at the NYT that I recommend reading in full. But I want to highlight one part in particular where he quotes from a letter he received from a Chinese man whose aunt got a job at a Foxconn like factory that allowed her to leave her old job of prostitution:

If Americans truly care about Asian welfare, they would know that shutting down “sweat shops” would force many of us to return to rural regions and return to truly despicable “jobs.” And I fear that forcing factories to pay higher wages would mean they hire FEWER workers, not more.

What bothers me about some of the commentary I’ve been reading on this is that  many who are bothered by Foxconn are saying things that imply they don’t in fact truly care about Asian welfare, as Pogue’s correspondent put it. But I don’t think most don’t care, rather I agree with Krugman they simply haven’t thought through the implications.

Take, for example, Andrew Leonard writing at Salon about a labor union PR man who is searching for “an ethical smartphone”:

Wood embarked on a quest to see if he could find, at the very least, a smartphone that wasn’t quite so badly compromised as all the others… He wondered whether he should cut Samsung a break because the company kept more of its manufacturing in house in South Korea — where the labor laws were better enforced than in China or Vietnam.

Now South Korea has a per capita income of around $30,000, while China’s is around $8,400 and Vietnam is even lower at $3,400. So, predictably, Wood thinks it’s more ethical for a company to locate it’s operations in the nation that is somewhere between four to ten times richer than the alternatives. I struggle to see what the moral philosophy is that finds benefitting richer workers instead of poorer ones to be more ethical. He frames the issue in terms of rewarding nations that enforce labor laws better, but it will almost always be the case that richer nations enforce labor laws better.

And no, contrary to some of the arguments I’ve been seeing, a nation does not move from poor to rich by having stronger labor laws (or for that matter through more “ethical” consumption and the decision by consumers altruistically to pay more for goods). Yes, well functioning governments and institutions are an important part of the recipe for growth, but labor laws will be skated even in very rich countries when businesses save a lot of money by doing so. Thus we see that even in the U.S. many employees break labor laws by hiring illegal immigrants, but very few attempt to sneak past regulators by instituting 1800s style safety regulations. This is because 1800s safety and work rules would cost employers a lot of money as the laws are very far from what the free market would dictate. If you want workers with high marginal productivity and concomitant ability to demand high wages to do something dangerous then you have to pay them to do it.

This is why the causality works primarily like this:

  1. Worker productivity rises
  2. Wages rise
  3. Workers are less willing to accept unsafe conditions for marginally higher wages
  4. Compensating differentials increase so dangerous working conditions become more expensive for employers
  5. The difference between free market safety levels and those specified by labor laws narrow
  6. Complying with said laws is cheaper
  7. Compliance increases

This is not to say that labor laws can’t or don’t increase safety. They certainly can on the margin, especially as rising wages and worker safety preferences makes complying with them cheaper. But most of the observed difference in working conditions between the developed world and the developing world is due to the above mechanism, and not labor laws themselves.

If you want to make Chinese workers better off in terms of safety and working conditions, you’re missing the main point if you ignore productivity. Which, by the way, is hurt when foreign investment and capital locates in richer countries instead of poor ones. People who don’t like what they see at Foxconn would do well to remember this and stop calling companies who choose to locate operations in rich countries more “ethical”.

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