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Monetize Labor Practices
A response to "Realizing Labor Standards."

Ian Ayres

Is it possible to contract for profit with poor people without being labeled an exploiter? Can you rent to the poor without being a slumlord? Can you lend to the poor without charging usurious interest? Can you hire the poor without running a sweatshop?

Of course, if the terms are fair, contracting with the poor can be a good thing. But how are we to know whether a particular relationship is fair? In the absence of good information about the terms of trade, we tend to think that profiting from contracts with poor people is presumptively bad. We infer abuse from the background characteristics of poverty and profit.

But an irrefutable inference can be pernicious. If an employer who hires poor people is going to be vilified as running a sweatshop regardless of what she does, then what incentive does she have to do the right thing?

So we may be caught in an unhappy equilibrium. In the absence of better information, consumers rationally worry that products manufactured for profit in desperately poor countries are unclean. But manufacturers have no credible mechanism to give them better information: anything the manufacturers say is bound to be treated as suspect.

The "Ratcheting Labor Standards" (RLS) idea espoused by Fung, O'Rourke, and Sabel shows promise in mitigating this problem. By providing consumers with a metric of labor conditions assessed by independent auditors, RLS might be able to foster competition in the fair treatment of labor. Knowing that improved working conditions would be reported to consumers by credible monitors, manufacturers would have an incentive to make improvements. So RLS could provoke a race toward the top instead of toward the bottom.

I worry, however, about the authors' emphasis on "continuous improvement" and "ratcheting." If manufacturers correctly sense that nothing they do will ultimately prove sufficient, they will be less willing to cooperate with the institution of RLS. The notion of what would constitute fair working conditions is not adequately defined, but seems to be ever-expanding. For example, to avoid a charge of exploitation, Microsoft could not simply say that it was paying more than the going rate in the country, and that there was excess demand for its jobs—because under RLS the core comparisons seem to be across countries. Meanwhile, under the "continuous improvement" principle, even a manufacturer who shows that it paid more that manufacturers in similar countries might not be in the clear for long. The authors intend to keep ratcheting up the standards. Their proposal eschews any safe harbor.

I also worry that as currently articulated the RLS standards are too mushy to provide consumers with much credible information. In rating a facility, the faithful monitor is supposed to compare the treatment of workers in different developing countries and to heed the "voice of the workers." The monitor's Delphic pronouncements of "good" or "bad" would have little falsifiable content. This puts too much pressure on the legitimacy of the monitor and the monitor's monitor. But these monitors might themselves be captured by political as well as industrial interests. If confidence in the monitoring system declines, however, then we are back to square one: consumers do not know what to believe, and manufacturers consequently lose the incentive to make improvements.

My friendly amendment is that RLS should strive to monetize labor practices. Specifically, firms that disproportionately manufacture in developing countries should be encouraged to disclose point-of-purchase information about the average hourly labor costs of manufacturing particular goods. A consumer poised to buy a Timberland shoe might be willing to buy a more expensive brand upon learning that the employees had only been paid 22 cents per hour.

Money is the quintessential metric of value. While it is difficult to monetize the quality of housing that a landlord provides, the most important part of an employer's treatment of labor is already monetized—i.e. the employee's wage. Of course, it would be necessary to monetize other aspects of an employer's labor practices. Employers who provide health care should be able to monetize these labor costs as well as the nominal wage. And an adjustment for long hours might be implemented by discounting (by a third) the wages of those who work more than forty hours a week.

Some labor practices, however, are resistant to the monetization approach. Occupational safety risks would be more difficult to assess, although for large enough or long-enough-lived enterprises, such as Pou Chen, it might be possible to monetize the historical accident rate.

But it is probably better to leave the metric slightly underinclusive but more transparent for the harried consumer. Disclosing the average hourly labor costs of products still gives consumers a highly probative summary statistic of how well labor is treated. The essential point is that consumers think the information is reliable, and that they know how to interpret it. Providing consumers with labor cost information also allows them to make an informed judgment about whether they are willing to pay more for a fairer wage. Instead of the a priori imperative that standards continuously improve, a neutral disclosure regime would cast the consumer as the ethical sovereign determining what level of compensation is fair. Indeed, one could even imagine a disclosure regime that lead toward a ratcheting down—if consumers felt that some workers were being paid an unfairly high wage (say, relative to the wage of the consumer herself).

Ben and Jerry's tried an imperfect version of wage disclosure for a number of years—pledging for a time that its highest paid employees would earn no more than seven times the salary of its lowest-paid full-time employee. While the salary pledge was insufficiently inclusive (excluding the value of executives' stock and options), the central idea of providing consumers with a falsifiable numeric claim has merit.

Each year, law students pour over the form resumes that law firms fill out to recruit students. The forms require the firms to describe their attitude toward pro bono activities and the firms invariably (and thus uninformatively) report that they such work is "strongly encouraged." Now, one approach consistent with RLS would be to have independent monitors undertake multifaceted analysis of a firm's pro bono practice. But to my mind, it would be better to ask firms to report the average number of pro bono hours provided by attorneys in the firm. This is a more minimalist system that is more likely to encourage the kind of ethical competition that is really the core contribution of the RLS idea. •

Ian Ayres
is the William K. Townsend Professor at Yale Law School. He is the author of Pervasive Prejudice?: Unconventional Tests of Race and Gender Discrimination.

Read all eight responses to "Realizing Labor Standards," by Archon Fung, Dara O'Rourke, and Charles Sabel.

Originally published in the February/March 2001 issue of Boston Review

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