The Second Sweatshop Century

We are now well into the second sweatshop century. As with the first, we have horrific human rights violations in global supply chains, consumer boycotts, and corporate codes of conduct. Our responses to and understanding of sweatshops at the start of the 21st century bear a striking resemblance to those at the start of the 20th.

I share Richard Locke’s view that consumer-product labels, corporate codes of conduct, capacity building, technical upgrading, and buyer-funded humanitarian interventions have had limited effect. In a perfect world (albeit, one with sweatshops), the proper place to seat the protection of labor would be with unions and local law. Yet, being the incurable optimist that I am, I would like to offer a somewhat more hopeful spin on the current, seemingly bleak state of affairs.

Locke rightly focuses on a deficit in managerial capital in sweatshops. Powerful evidence of these deficits comes from a recent study of Indian textile factories. An improvement in basic managerial practices—removing information barriers concerning inventory management and production-floor organization—increased profits by 17 percent. When it comes to managing workers in particular, the most obvious efficiency gains occur when firms begin to pay workers as promised rather than engaging in deceptive pay practices. High-powered pay incentives are effective in motivating improved work effort.

Consider a second example: sexual harassment. Harassers weaken firm performance by lowering morale, inhibiting communication, and increasing workforce turnover. Sexual harassment arises most commonly in factories with multiple management failures. Misaligned incentives and a lack of organizational awareness are significant contributing factors. Misalignment occurs when workers are paid based on a production quota, while production supervisors are paid by the hour. In such a situation, the supervisor has both the opportunity and the motivation to extract bribes or sexual favors from subordinates in exchange for positive performance evaluations.

The capability-building theory fails to rectify such deficits in firm performance because corporate compliance personnel do not have the expertise to diagnose and remedy human-resource management defects. The quality-upgrading theory fails because the managerial skills required for producing good products are only weakly related to the managerial skills necessary to create a humane work environment.

Which brings us to enforcement. During the 19th century, a country could force compliance with labor standards by threatening a trade war with any partner that used weak labor protections to gain an export advantage. Today the threat of retaliation is limited for members of the World Trade Organization (WTO) by the 1996 Singapore Ministerial Declaration. However, there is a loophole in the WTO Charter. By invoking Article XXIV of the Charter, covering special and differential treatment, countries establishing preferential trade agreements can require that trading partners comply with labor standards.

Operating under this Article, the United States managed to enforce International Labour Organization (ILO) standards in the 1999 U.S.-Cambodia Bilateral Textile Trade Agreement. The United States provided Cambodia access to U.S. markets by offering expanded apparel and textile quotas conditional on improved working conditions in the garment sector.

In an analysis of the ILO’s Better Factories Cambodia (BFC) program, my colleagues and I have found that BFC assessments increased compliance significantly beyond that achieved by the private efforts of reputation-sensitive buyers. After four assessments, low-compliance factories caught up with high-compliance factories. The threat of public disclosure deterred any retrogression in compliance, even at factories that were not selling to a reputation-sensitive buyer. And BFC-induced compliance lowered the probability of plant closure.

Our research supports the conjecture that the ILO has the capacity to enforce labor standards when they are accompanied by the threat of trade sanctions. And it appears that assessments encourage factories to experiment with human resource–management innovations that are both humane and profitable.

So we have come full circle. Our understanding of sweatshops is perhaps more nuanced now than it was during the first sweatshop century, but the fundamental lessons from that era are still true today. The labor compact that arose across Europe at the end of the 19th century was the product of internationally coordinated labor standards enforced through the threat of trade sanctions, which had the remarkable effect of driving technological change and raising labor productivity enough to justify the higher wages and better working conditions required by domestic labor law. Hence my optimism.