70-80% of consumers surveyed say they are willing to pay more for a product made under “good labor standards.” But, given the opportunity, would they really pay more? Michael J. Hiscox and Nicholas F. B. Smyth of Harvard University try to answer this question in this new paper.
They set up an experiment in an ABC Carpet & Home retail store in New York City. They looked at two products: candles and towels, with two brands for each good. Each brand was initially about the same price. After getting some baseline measurements, they put out a sign near one brand stating
“These candles [towels] have been made under fair labor conditions, in a safe and healthy working environment which is free of discrimination, and where management has committed to respecting the rights and dignity of works.”
The prices were left unchanged. During that few weeks, the ratio of labeled brand sales to unlabeled brand sales increased. Here is the interesting part, however: Next they raised the price on the labeled brand by 10%, and the ratio increased even further! Perhaps some people simply didn’t believe the label when prices were the same for both brands. Next they raised the labeled brand price 20% and the ratio still increased!
So what is the significance of this?
Well, one way is to look at labels as correcting an “inefficiency that exists due to incomplete information.” The authors call it a “form of ethical product differentiation,” but I am leery of making this judgment by calling ‘fair’ labor conditions an ethical issue. The economists’ view is usually to consider a worker’s alternative and infer that, given freedom of choice, the worker has made a decision which is best for him/her.
The authors also conclude that this social labeling might be a good way to increase worldwide working conditions without hindering growth. This I am skeptical about as well, but I certainly agree with them here:
“Along with labor unions, such activist groups –often referred to broadly as non-governmental organizations (NGOs) – have lobbied for the inclusion of minimum labor standards in trade agreements, and for trade embargoes on countries with especially poor human rights records…. These types of demands and campaigns warrant scrutiny and concern for several reasons. Imposing trade sanctions on countries for failing to meet labor standards could have a negative impact on economic growth in the very poorest developing countries where governments are most likely to resist making major political concessions….. [T]o the extent that companies are forced to improve standards in the face of such negative publicity, they are also less likely to invest in production abroad. If firms decide to shut down factories altogether in some developing countries, is this a victory for workers there?”
Amen to that! Plenty of people fail to get all the way to that last sentence. So in response to this, I welcome social labeling with open arms if it means eliminating interest groups’ restricting freedoms via government. He notes the best part about these labels is that “Consumers who do not choose to pay the higher prices for the labeled goods (perhaps simply because they cannot afford it) would not be forced to do so.” Hurray for individual choice and freedom!!
Anyway…. Again, I express my general concern that these labels are misleading. They imply that by purchasing this particular product, the customer is making an important difference to some poor farmer/laborer. This is not the solution to world poverty and low standards of living. We know how to solve these problems: economic growth and development. Simple as that. (well, not quite) But the bottom line is that certain macro level conditions are highly conducive to increasing peoples’ standards of living, and it is those that we must strive for in these developing countries. Giving farmers a little above the market price and making factory conditions a little better (which is almost equivalent to keeping conditions the same and paying the workers more) is not the solution.
P.S. Related topic: Who says you can’t put a price on the environment?
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