2016-02-24

Sweatshop Math

This is what lower-class urban Bangladesh looks like

Donald Boudreax is posting about sweat shops this morning, and some colleagues of mine were recently discussing the presumed immorality of sweat shops the other day, too. Consequently, this seems like as good a time as any to add some simple thoughts of my own.

To understand why so-called "sweatshops" are less objectionable than they seem, we must assume that it is us ourselves who want to open a factory overseas.

Start with some basic assumptions:

  1. We have $100,000 to spend on labor costs.
  2. Widgets are produced in batches, and batches are then shipped Stateside to be sold.
  3. Every employee we hire produces 10 widgets per batch.
This means we can hire one employee and pay him $100,000, two employees paid $50,000 each, four employees paid $25,000 each, and so on.

This also means that one employee will yield 10 units per batch, two employees will yield 20 units per batch, four employees yield 40 units per batch, and so forth.

Median household income in the United States is a little over $50,000 per year, so let's keep things simple. If we want to pay our overseas employees as though they were Americans, we could only hire two of them. We will end up with 20 units, and we must hope that we can sell these units for $5,000 apiece in order to break even. (Yes, I'm ignoring sunk costs, shipping costs, etc.)

Now, very few items can be sold for $5,000 apiece, particularly when we're talking about items manufactured overseas. In fact, we probably started looking into outsourcing this labor in an effort to keep costs (and therefore prices) competitive. Most probably, we selected a country whose labor costs are low.

Median household income in Bangladesh is about $600 per year. At this level of income, we can now afford to hire about 167 employees and produce 1,670 units, which we can sell for $59.88 apiece to break even. 

Alright then - now we have ourselves an attractive business case. 

The problem here is that this means we are paying our employees less than $2 per day. I'll say that again: This means we're paying our employees less than $2 per day. 

Let's recap:
  • We are paying our employees the median income of their country.
  • Our business is barely breaking even.
  • Most American social activists would accuse us of running a sweatshop.
The point here is that it's not exactly easy to solve the poverty problem by raising salaries. The math just doesn't work out that way.

This is what middle-class urban Bangladesh looks like