Jewish World Review Jan. 28, 2004 / 5 Shevat, 5764

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Third World sweatshops, Part II | Those who vent their moral indignation over low pay for Third World workers employed by multinational companies ignore the plain fact that these workers' employers are usually supplying them with better opportunities than they had before, while those who are morally indignant on their behalf are providing them with nothing.

Some of the more rational among the indignant crusaders for "social justice" may concede that the employers are usually offering better pay than Third World workers would have had otherwise. But they see no reason why wealthy corporations should not pay wages more like the wages paid in affluent countries.

There are at least two reason why not — one economic and one moral.

The economic reason is that output per man-hour in Third World countries is usually some fraction of what it is in Western industrial nations such as the United States. Pay rates raised without regard to productivity are a virtual guarantee of unemployment, whether it is done in the name of ending "exploitation" in the Third World or providing "a living wage" in the United States.

Most modern industrial nations have minimum wage laws but those with higher minimum wage rates or additional workers benefits tend to have higher unemployment rates.

Germany, for example, has perhaps the most employer-provided benefits mandated by government. These benefits include such huge severance pay that firing anyone is likely to be uneconomical. The costs of these benefits have been estimated as roughly double those of employer-provided benefits in the United States.

If you think that is great for the workers, remember that there is no free lunch, for workers or anybody else. The high cost of labor and the difficulties of firing anyone mean that employers are reluctant to hire, even when times are booming.

It is often cheaper to expand output by using more labor-saving machines, or to work the existing workforce overtime, rather than hire more employees. While Americans become alarmed when unemployment reaches 6 percent, double-digit unemployment has been common in Germany.

At one time, neither Switzerland nor Hong Kong had minimum wage laws. Last year, The Economist magazine reported: "Switzerland's unemployment rate neared a five-year high of 3.9 percent in February." For most countries that have minimum wage laws, 3.9 percent would be a five-year low, if not wholly unattainable.

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Back when Hong Kong was a British colony and its wage rates were set by supply and demand, the Wall Street Journal reported that its unemployment rate was less than 2 percent. Then, after China took over Hong Kong and mandated various worker benefits — which add to labor costs, the same as higher wage rates — Hong Kong's unemployment rate went over 8 percent.

This was not high by European standards but it was unprecedented for Hong Kong. There is no free lunch in any part of the world.

Why cannot rich multinational corporations simply absorb the losses of paying Third World workers more than their productivity is worth? Why shouldn't they?

First of all, multi-billion-dollar corporations are seldom owned by multi-billionaires. They are usually owned by thousands, if not millions, of stockholders, most of whom are nowhere close to being billionaires. Some may be teachers, nurses, mechanics, clerks and others who own stock indirectly by paying into pension funds that buy these stocks.

Indeed, the average incomes of all the stockholders — direct and indirect — may be no greater than the average incomes of those intellectuals, politicians, and others who want them to absorb the costs of higher pay in the Third World.

But if teachers, nurses, mechanics, and clerks are supposed to accept less money to live on in their retirement years, why shouldn't similar donations to the Third World come from reporters for the New York Times or Ivy League professors, movie stars or others who are morally indignant?

Or is this just one of many things that the morally indignant think is worth having others pay for, but not worth enough to pay for themselves?

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JWR contributor Thomas Sowell, a fellow at the Hoover Institution, is author of several books, including his latest, "Applied Economics: Thinking Beyond Stage One." (Click HERE to purchase. Sales help fund JWR.)


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