In the internationally competitive global labour market, people earn wages equal to the value of their marginal products, which is the additional output that they produce. The proximate cause of low wages is low productivity. The ultimate causes of low wages are institutional environments that stifle entrepreneurship and investment.
Sweatshop opponents criticise the use of child labour in developing countries and argue that these children should be in school rather than the labour market. At current income levels, this simply is not feasible for many people. In subsistence economies, many people do not have the luxury of diverting their attention from manual agricultural labour and towards education. The best way to fix this is not to mandate more stringent labour standards but to encourage economic growth.
This helps us re-frame the question of global poverty: we have to look for the specific institutional mechanisms by which opportunities are restricted, and a growing body of evidence suggests that economic freedom is essential to growth.
Critics of the poor working conditions in less developed countries argue that the wages offered in so-called “sweatshops” are unacceptably low and the working conditions wretched. They probably are when we compare them with western standards. As economists have pointed out time and again, however, this is not the relevant comparison. The relevant comparison is the worker’s next best opportunity, which is always worse. As economist David Henderson has argued, we do workers no favours when we remove the best of a lot of very bad possible choices.
Even if we grant that all of the criticisms of sweatshops are true, international labour standards are still not the answer. Opponents of sweatshops would make more headway by looking for ways to expand the options of sweatshop workers by increasing mobility across national borders. Relaxing restrictions on international labour mobility would substantially increase standards of living for the poor.
Progressives are enthusiastic about microfinance programmes, and while these are probably a step in the right direction they are unlikely to fully alleviate poverty. In a book that is available as a free download, economist Lant Pritchett argues that the increase in earnings associated with a lifetime of access to microfinance programmes is roughly equal to the increase in income associated with working in the United States for eight weeks. This suggests that the appropriate policy is not to strengthen labour standards but to open borders and allow people to cross them freely.
The authors will explore these issues at greater length in the December 2009 issue of Economic Affairs.