CNN.com reports that a few days ago, Mexican authorities found 513 people packed into two tractor-trailer trucks who had paid $7,000 to be smuggled into the United States illegally. Why would they be willing to pay that much, endure those kinds of conditions, and take that kind of risk just to come to the United States? What does this episode teach us about international economic policy?
Its easy to be outraged, but outrage that isnt tempered by careful economic analysis creates policies that, in a bit of cruel irony, oppress the very people they are alleged to help. Lets explore this in the context of the global market for capital (sweatshops) and the global market for labor (immigration).
Consider sweatshops in developing countries. Sweatshop experts Benjamin Powell and David Skarbek have presented evidence suggesting that what we call sweatshops are the best of a lot of bad situations. In a 2006 paper, Powell and Skarbek showed that many sweatshops offered higher standards of living than many alternatives. In a 2006 paper that appeared in Human Rights Quarterly, Powell argued that a lot of anti-sweatshop initiatives are (perversely) likely to hurt workers in poor countries. In a paper that will appear in the American Journal of Economics and Sociology, Skarbek and a team of co-authors who share his last name report data from field interviews with sweatshop workers in El Salvador and conclude from these interviews that sweatshop jobs improve workers opportunities.
I borrow here from Professor Powell. Two factors combine to determine wages. On the supply side, wages are determined by workers other opportunities. Competition means employers have to pay more when workers have more and better opportunities. On the demand side, wages are determined by workers ability to produce revenue.
Wages emerge from supply and demand. Firms will hire up until the point that employing an additional hour of labor or an additional worker would add more cost than revenue. Workers will supply labor up until the point that supplying an additional hour of labor isnt worth the income from doing so in the eyes of whoever might supply that last hour. If we make labor more expensive, firms will hire less of it.
Workplace safety mandates might also hurt workers. Compensation comprises a bundle of wages and working conditions. If we force employers to improve workplace safety, workers will then earn lower wages. There are all sorts of reasons a worker might prefer higher pay to a safer workplace. If we mandate safer workplaces, we make those workers worse off.
Be that as it may, one may be tempted to respond that surely, gargantuan firms like Nike, Wal-Mart, and others can afford to pay more. Actually, they cant because they are competing in a globally competitive market for financial capital. If Nike decides to absorb the costs of paying higher-than-market wages and accept lower profits, they will have trouble raising capital because investors will ask why should I accept a 4% annual return when I can get 5% by investing in Reebok?
One might be tempted to claim that we should be ethical investors who invest in ways that will transfer wealth to the least of these among us and without concern for profitability. A business that does not maximize its profits creates a smaller pool of new resources out of which to invest in the future. Less capital means lower productivity and, therefore, lower wages. Firms can pay higher wages now, but only if they pay lower wages tomorrow.
Fortunately, we can do a lot for the worlds poor. First, we can make it easier for firms to invest in poor countries. This gives poor workers more options and raises wages. Second, we can open our borders to immigrants. Economist Lant Pritchett has argued convincingly that open immigration would raise the incomes of the worlds poor more than any other development idea being discussed. Further, its almost a free lunch for workers in developed countries because immigrants bring skills that are complements to rather than substitutes for the skills possessed by domestic workers. If were evaluating policies that are supposed to help the worlds poor, open immigration is advisable. If were going to make policy as if flesh-and-blood human beings matter, open immigration is imperative.
Thomas Sowell said it well: I dont have faith in the market; I have evidence. The evidence on sweatshops and immigration is pretty clear. More capital invested in poor countries means higher incomes for workers in those countries. More immigrants in rich countries means higher incomes not only for the migrants, but also for native workers in those countries. If advocates for the worlds poor really want to do something that actually helps the worlds poor, they should quit protesting sweatshops and start working to eliminate barriers to free trade and free immigration.