Multinationals, Wages, and Working Conditions in Developing Countries

Summary of working paper 9669
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Foreign-owned and subcontracting manufacturing firms in poor nations tend to pay higher wages than local firms, and ... export-oriented firms tend to pay higher wages.

Do multinational firms exploit workers in poor nations? In The Effects of Multinational Production on Wages and Working Conditions in Developing Countries (NBER Working Paper No. 9669, originally presented at the 2002 NBER International Seminar on International Trade), authors Drusilla Brown, Alan Deardorff, and Robert Stern offer a resounding "no." Indeed, the authors conclude that "there is virtually no careful and systematic evidence demonstrating that...multinational firms adversely affect their workers, provide incentives to worsen working conditions, pay lower wages than in alternative employment, or repress worker rights." In fact, they argue, the opposite is true.

Their paper begins with an overview of two influential organizations involved in the anti-sweatshop movement: the Fair Labor Association (FLA), and the Worker Rights Consortium (WRC). The FLA was created in 1998 as an outgrowth of Apparel Industry Partnership established by the Clinton administration, while the WRC is the product of student movements on U.S. campuses. Although the groups differ on specific issues-such as the establishment of a "living wage" and the choice of confrontation versus dialogue as campaign tactics-they have both sought to provide codes of conduct and to monitor multinational firms that produce apparel and related items for colleges and universities.

Academic economists have different responses to these debates. In September 2000, a group of economists (including Deardorff and Stern) formed the Academic Consortium on International Trade (ACIT). It circulated a letter to presidents of 600 academic institutions, urging that greater attention be given to the possibility that mandating codes of conduct and higher wages in response to the anti-sweatshop advocates actually could be detrimental to workers in poor countries. In October 2001, a rival group called Scholars Against Sweatshop Labor (SASL) wrote a letter to some 1600 academic presidents, expressing their support for the activist movements.

Further, a careful examination of economic theory on capital and technology flows fails to reveal any unambiguous conclusions regarding the impact of multinational production on wages in host countries, the authors contend. "There seems to be a presumption...that FDI [foreign direct investment] will at least raise some wages, but even this is not certain..." they explain. "It is therefore an empirical question whether the actual operations of multinationals have raised or lowered wages in developing countries."

When they look at the empirical evidence, the authors review survey data as well as econometric studies. The surveys they cite reveal that foreign-owned and subcontracting manufacturing firms in poor nations tend to pay higher wages than local firms, and that export-oriented firms tend to pay higher wages. In Mexico, for example, firms with more than 80 percent of all sales devoted to exports paid wages at least 58 percent higher than non-exporting firms. And, a 2001 study found that foreign-owned plants in Indonesia paid 33 percent more for blue-collar workers and 70 percent more for white-collar workers than locally owned firms.

Brown, Deardorff, and Stern consider possible reasons for such wage premiums and conclude that the premiums are most likely linked to labor productivity gains resulting from foreign ownership. Interestingly, the authors explain that, since the largest premiums accrue to white-collar workers, foreign investment may raise wages on average yet produce increased income inequality between skilled and unskilled workers in the host nation.

Finally, the authors tackle the popular criticism that multinational firms are drawn to countries with poor worker rights. Citing a 1997 survey of transnational managers, the authors explain how labor costs are actually less important than many other factors -- such as market size, political stability, labor quality, and the legal environment -- that global companies consider when they select a country or location for FDI. "Labor rights that promote political stability and enhance labor quality," the authors explain, "may in fact make a particular location attractive to foreign investors." Also, the authors cite analyses finding that FDI is positively correlated with the right to establish unions and the right to strike, but negatively correlated to an index of child labor. Most conclusively, they cite a 2001 study by International Labor Organization economist David Kucera, who finds that FDI is attracted to countries with stronger civil liberties, even if labor costs there are higher.

The authors acknowledge that public pressure might be brought to bear on some multinational companies (and their suppliers) in cases of abusive labor policies in developing nations. But they caution that "measures that are punitive or provide firms an incentive to alter the location of production are unwarranted and may adversely affect the very workers they are intended to benefit."

-- Carlos Lozaday