SWEATSHOPS: KANT AND CONSEQUENCES Gordon G. Sollars and Fred Englander I: Arnold and Bowie (2003) attempt to derive ethical constraints on the actions of the managers of multinational enterprises (MNEsI, or the MNEs themselves, from a Kantian perspective. We contest Arnold and Bowie's claims regarding MNE duties, in particular that MNEs have a duty to pay a subsistence wage above market levels. We conclude that even within Arnold and Bowie's Kantian framework such a duty does not properly emerge. In addition, we argue that the account of coercion used by Arnold and Bowie does not serve their purposes. Amold and Bowie address consequentialist issues by arguing that their conclusions are not undercut by economic considerations regarding unemployment. We argue that Arnold and Bowie have misread the economic literature in this regard. Introduction Amold and Bowie (2003) attempt to derive ethical constraints on the actions of the managers of multinational enterprises (MNEs) or the MNEs themselves from a Kantian perspective. In particular, they adopt the Formula of Humanity version of Kant's categorical imperative, which they interpret in terms of respect for persons. Amold and Bowie use other elements from Kant's system of ethics, but state that even "sympathetic readers" (Amold & Bowie 2003: 222) who do not accept Kant's full system should be responsive to Kant's argument for the Formula of Humanity. From this starting point, Amold and Bowie claim to reach the conclusions that MNEs or their managers have duties not to tolerate or encourage violations of the rule of law,' use coercion, allow unsafe working conditions, or pay wages that are below subsistence levels. We contest Arnold and Bowie's claims, in particular, that they have established that MNEs have a duty to pay a subsistence wage above market levels.- Although we try to be sympathetic readers, we conclude that even within Arnold and Bowie's Kantian framework such a duty does not emerge. Regarding coercion, we agree with Amold and Bowie that coercion is wrong on Kantian (and, of course, other) grounds. No doubt instances of coercion exist, but we disagree that Amold and Bowie's example of a requirement to work overtime consfitutes an example of coercion even by their own definifion. Thus, a supposed paradigm case regarding sweatshops and overtime hours fails. 2007. Business Ethics Quarterly, yo\ume 17. Issue l.ISSN 1052-150X. pp. 115-133 BUSINESS ETHICS QUARTERLY Finally, although we applaud Arnold and Bowie for addressing economic i.ssues in an attempt to establish the feasibility of their subsistence-wage duty within a Kantian framework, we find that the weight of economic argument goes against them. As we discuss below, the best reading of current economic literature is that the raising of wages above market levels should be expected to increase unemployment, and, in particular, unemployment among the least skilled workers. Thus, if Kantian arguments actually could establish a subsistence-wage duty, concern for the well-being of the least-advantaged should be expected to lead to the classic tension between deontological and consequentialist concerns. Perhaps a strict Kantian perspective clearly favors the duty, trumping issues of consequences. However, Arnold and Bowie have broadened their audience beyond strict Kantians. by arguing that any persons sympathetic to the Formula of Humanity should accept the subsistence-wage duty. A pluralist view could both have such sympathy and be concerned about well being. Arnold and Bowie's argument does not address how conflicts between these perspectives should be resolved. I. Subcontractors and Suppliers Typically, MNEs do not employ workers under sweatshop conditions; rather the sweatshop workers are employed by subcontractors or suppliers of an MNE. This has led sweatshop critics to argue that such MNEs inherit responsibility for the actions of these other entities. Arnold and Bowie (2003: 226) present three arguments in favor of the idea that MNE are responsible for the practices of their subcontractors or suppliers. The first argument is actually quoted from Santoro (2000: 161). Santoro asserts that the standard for judging MNE responsibility for the treatment of sweatshop workers by subcontractor or supplier companies "is similar" to the legal doctrine of re.spondeat superior. First, we note that neither Santoro nor Arnold and Bowie give an argument that provides a moral justification for this legal doctrine, which is part of the law dealing with master-servant relationships. In particular, Arnold and Bowie do not attempt to derive it from the Formula of Humanity, which is their acknowledged Kantian touchstone. However, illustrating the usefulness of a Kantian perspective is only one of Arnold and Bowie's goals, and so for the sake of the argument we will assume the moral legitimacy of respondeat superior. The law distinguishes between a "servant." for whose actions the master may be liable under respotxdeat superior, and an "independent contractor," for whose actions the master is not liable. We claim that for an argument to be "similar" to respondeat superior, the argument should retain the distinction between servant and independent contractor. Thus, the question becomes whether subcontractors and supphers are properly construed as servants rather than contractors. Gifis defines a "contractor" as "one who makes an agreement with another to do a piece of work, retaining for himself the control of the means, method and manner of producing the result to be accomphshed, neither party having the right to termi SWEATSHOPS: KANT AND CONSEQUENCES nate the contract at will" (Gifis 1984: 97). The same source defines a "servant" as a person who "with respect to the physical conduct in the performance ofthe services is subject to" the control of another (Gifis 1984:438). The commonsense meanings of "subcontractor" and "supplier" clearly favor the first definition over the second; indeed, a "subcontractor" is a kind of contractor, and thus not a servant. Further, as a factual matter, we claim that subcontractors and suppliers are not typically subject to the control of MNEs in their "physical conduct." Finally, the Restatement of Agency {2d) states that "service under an agreement to use care and skill in accomplishing results" marks an independent contractor.- Such service is the essence of the outsourcing relafionships that MNEs have with subcontractors. It might be said in defense of Arnold and Bowie's gesturing at respondeat superior that they simply mean to claim that subcontractors or suppliers are agents of MNEs, and that this agency confers responsibility on the MNEs.-* We do not wish to deny that it is logically possible for such responsibility to be conferred on MNEs in some fashion, in some circumstances. However, the respondeat superior doctrine is all that Arnold and Bowie offer in this regard, and this very doctrine clearly illustrates that the principal/agent relationship does not necessarily confer responsibility for an agent's action on the principal. Indeed, it seems designed to exclude the very agents at issue in the sweatshop debate. The blanket statement that MNEs are responsible for the actions of their subcontractors and suppliers might be true, but it is simply not supported by the invocation of respondeat superior. The second argument is that managers of MNEs are simply individuals who are constrained to show respect to others, including the employees of subcontractors or suppliers, as required by the categorical imperative in its Formula of Humanity interpretation. The challenge here is to unpack what is meant by "respect." Arnold and Bowie begin with the straightforward Kantian claim that showing respect means treating persons as ends in themselves. Next, they approvingly cite Hill (1992) regarding the implication of Kant's arguments concerning the treatment of persons as ends. According to Arnold and Bowie, Hill argues that treating persons as ends in themselves requires "supporting and developing certain human capabilities" (Arnold & Bowie 2003: 223). They add that Kant also argues that mere indifference fails to show respect, and that there is "an obligation to be concerned with the physical welfare of people and their moral well-being" (Arnold & Bowie 2003: 223). Finally, Arnold and Bowie's second argument incorporates by reference the argument in Bowie (1999). • All of this is in preparation for Arnold and Bowie's claim that, with regard to wages, respect for persons requires a forty-eight hour per week wage level that is sufficient to satisfy basic food and non-food needs: Doing so helps to ensure the physical well-being and independence of employees, contributes to the development of their rational capabilities, and provides them with opportunities for moral development. (Arnold & Bowie 2003: 234) We find a number of difficulfies with this argument. First, we simply do not read Hill's discussion of human capabilities as making the claim that these capabilities BUSINESS ETHICS QUARTERLY require development and support. The references given in both Arnold and Bowie (2003) and Bowie (1999) to Hill's capability discussion are to a description of the capabilities that Kant includes in the nofion of "humanity": acting on principles; following hypothetical imperatives; setting goals; accepting categorical imperatives independently of reward or punishment; and some ability to understand the world and reason abstractly (Hill 1992:40-^ 1). Hill himself says nothing about a require ment to "develop and support" these capabilities in that discussion, and he makes it clear that Kant believed that this degree of humanity belongs to even "the most foolish and depraved persons" (Hill 1992: 41). These are capabilities that ordinary human beings possess as a matter of course. Second. Hill's own discussion demonstrates that it is not an easy matter to be sure what Kant meant by "always treating humanity as an end." Hill reviews a number of things that Kant says about ends, in particular, that objective ends are to be "conceived only negatively^that is, as an end against which we should never act" (Hill 1992:44). The straightforward reading of this. Hill allows, is that treating humanity as an end can be achieved simply by restraint—no positive effort to help others by "development and support" is required. In light of Kant's various other remarks. Hill himself finds this statement about ends "puzzling" (Hill 1992: 44). In an attempt to resolve this puzzle (and other difficulties). Hill turns to Kant's distinction between personal ends—which only have a price—and ends in themselves—which have a dignity, that is. an "unconditional and incomparable worth" (Hill 1992: 47). It is at this point that Hill begins to prescribe what respect for persons entails, rather than simply describe the constituent capabilities of humanity possessed by any ordinary person. He lists seven items: 1) refusing to damage a person's rational capacities (e.g., via drugs or lobotomy); 2) refusing to destroy a person; 3) attempting to develop and improve rational capabilities; 4) attempting to exercise these capabilities as far as possible; 5) appealing to reason rather than use manipulation; 6) leaving freedom for others to pursue their (rational) ends; and 7) requiring that humanity should be honored or at least not "mocked, dishonored, or degraded" (Hill 1992: 50-51). We note that the first, second, sixth, and seventh items are consistent with the idea that only restraint, not any positive "developing" or "supporting" action, is required. Indeed, if we idenfify. as seems plausible here, "manipulation" with "coercion." then item five can be viewed in the same way." Now it is clear on Kantian grounds that workers ought not to be coerced.^ From the discussion of respondeat superior above, we do not see how managers of MNEs are responsible for such coercion of workers as might occur, initiated by subcontractor or supplier companies. However, while the status of subcontractors and suppliers as independent contractors insu SWEATSHOPS: KANT AND CONSEQUENCES lates MNEs from responsibility for coercion. MNEs certainly ought not endorse or acquiesce in the use of coercion by their subcontractors or suppliers. Our concern is with imperfect duties, not the violation of perfect ones. Items three and four deal with rational capacities. With regard to item three, the development of rational capacities, Kant, perhaps surprisingly, does not hold that we have a duty to develop the rational capabilities of others (Hill 1992: 52; Kant 1964: 44). Hill does note that Kant was. nevertheless, "in his own life" committed to the idea that "one should at least provide opportunities for others' rational development" (Hill 1992: 53). This brings us to item four, which deals with each person's own exercise of these capacities. Here, Hill points out that reason is to be exercised in order to attain "moral perfection." not happiness, either one's own or others. Standing in the way of such perfection is pain, adversity, and poverty, since these are temptations to vice (Hill 1992: 53). However, assuming that coercion and deception are not present, the bargain between employer and employee improves the situation of the employee from her own perspective, that is, in terms of her own plans and projects. The bargain acts to lessen the pain, adversity, or poverty present in a pre-existing situation. To the extent that MNBs contracting with various companies that employ sweatshop workers create jobs for workers, MNEs are assisting in the exercise of reasoning by workers. Thus, they contribute to the provision of item three, even though Kant, at least, did not consider it a duty to do so. Now, Arnold and Bowie might argue that managers of MNEs could do more for the employees of their subcontractors and suppliers. This is true, but then so could anyone. We must be careful not to implicitly turn the ethical principle that "ought implies can" into "can implies ought."** There is any number of things that could be done to remove pain, adversity, or poverty. The bargain (excluding coercion or fraud) between employer and employee is one of those things, and it is perverse to fault it in particular because it might have done more for one party. Note that we do not imply here that a sweatshop worker has no moral grounds for complaint against some party or other simply because she makes a bargain with a subcontractor or supplier of an MNE. Rather, our point is that the subcontractor or supplier has done something via the bargain to reduce pain, adversity, or poverty, while other actors may have done nothing. It is unreasonable to expect any bargain struck between two parties to redress every issue of faimess or desert that may apply to one party. MNEs are in some sense "taking advantage" of background conditions in the Third World when they outsource their production, but this alone does not make them responsible for the poverty that makes their sourcing decisions profitable. It would be a different matter if. for example, particular MNEs conspired with host governments to keep sweatshop workers impoverished. However. Arnold and Bowie provide no examples of this. With regard to MNEs taken as a group, considerable evidence of their salutary effect on Third World poverty comes from a wide variety of sources such as those cited in Maitland {2001) and Brown. Deardorff. and Stern (2004). Arnold and Bowie point out that Kant argued that a rich person has a duty of charity that a poor person lacks, and that Kant acknowledged that individuals have BUSINESS ETHICS QUARTERLY particular duties as a result of particular circumstances.'' However, they do not at tempt to derive either of these claims from the Formula of Humanity interpretation of the categorical imperative, so it is not clear how central a position these claims hold in their approach.'" In any event, the duty of charity is a "wide" or "imperfect" duty. Thus, according to Hill's analysis, there is not only freedom to choose to do or not do some act of charity on some occasion, but also latitude for judgment in deciding if a given principle is relevant to a particular situation and freedom to choose vari ous ways of satisfying a principle (Hill 1992: 155). The decision to increa.se wages is precisely a matter of such judgment. The effect of such a decision could well be to increase unemployment, which would presumably increase pain, adversity, or poverty for those unemployed. Further, the employer could have other duties, in particular a duty to investors or other stakeholders that, given these freedoms of Judgment, may mitigate any duty to ameliorate pain, adversity, or poverty beyond the contribution the bargain already makes. We are not directly challenging the Kantian framework. Rather, we are pointing out that the framework itself does not provide support for the selection of a wage level (or working hours) apart from the knowledge of a myriad of factors that are purely contingent. Indeed, Hayek has argued that market institutions are the best we have for dealing with the severe constraints that human beings face in bringing our necessarily fragmented knowledge to bear in a way that will improve our welfare (Hayek 1945). A market wage, even one that is insufficient for meeting basic food and non-food needs, can still be the best alternative to unemployment. As a result of this item-by-item examination of Hill's claims, we conclude that a reliance on market-determined wages—absent coercion or deception—is fully consistent with the Kantian duties of individuals. Arnold and Bowie's third argument has already been touched on: tbe claim tbat individuals can have unique duties as a result of unique circumstances." We have previously raised the question of how this principle might be tied to the categorical imperative. However, we prefer not to propose and then critique such attempted ties ourselves. Rather, we will point out that Amold and Bowie have switched the focus from persons as moral agents to MNEs as moral agents. Arnold and Bowie stress the resources that MNEs have to "ensure that the employees of its business partners are respected" (Arnold & Bowie 2003: 227). However, the resources of MNEs are not the same as the resources freely available to any person who might be an MNE manager. We have dealt with the case of individuals above. Amold and Bowie make a separate point about MNEs with their third argument only to the extent that MNEs, as opposed to the individuals that comprise them, can have duties. We favor the view that organizations are not moral agents, but this contentious issue need not be explored here. Within a Kantian approach, viewing the corporation as a moral agent has the radical consequence that the corporation has a dignity, not a price. Thus, it would be wrong to buy or sell corporations or shares in corporations. Such a view would completely invalidate any present form of capitalism, and Amold and Bowie give no indication that they endorse such a view. Given the obvious SWEATSHOPS: KANT AND CONSEQUENCES problem with viewing the corporation as a moral agent from a Kantian perspective, we do not fmd that Arnold and Bowie provide sufficient detail for us to be confident that we understand exactly what they are claiming in their third argument. In any event, we do not see how to make sense of a claim that an organization has a duty to do some action X without also claiming that at least some individual in the organization has a duty to do some action Y. We have argued above that individuals do not have a duty to do such things Y as Amold and Bowie suggest would discharge such purported Kantian obligations. As such. MNEs (or their managers) cannot be faulted for the wage levels of their subcontractors or suppliers. This completes our critique of Amold and Bowie's attempt to derive a subsistence- wage duty from the Formula of Humanity. We believe that the attempt fails. However. Kantian arguments are famously recondite, and we do not wish to express overconfidence in our rebuttal. Kant states thai the various interpretations he gives for the categorical imperative are equivalent (Kant 1997: 43); therefore, each interpretation should yield the same answer regarding a putative duty. As an alternative check of our conclusion, we offer some additional analysis using the Formula of Universal Law interpretation of the categorical imperative: act only in accordance with that maxim through which you can at the same time will that it become a universal law. (Kant 1997: 31) This is to be understood in terms of what can be willed without contradiction, and Kant explains that there are two ways in which contradictions can arise. The first is that some actions have as their maxim something that could not even be conceived as a universal law without contradiction in the conception; the second is that some actions have as their maxim something that, although conceivable, could not be willed without that will contradicting itself. Korsgaard notes that there have been at least three different interpretations of what Kant meant by "contradiction" in the literature (Korsgaard 1996: 78). We cannot hope to do better than to follow the one favored by Korsgaard herself, the Practical Contradiction Interpretation. Korsgaard states: [Tlhe contradiction that is involved in the universalization of an immoral maxim is {hat the agent would be unable to act on the maxim in a world in which it were universalized so as to achieve his own purpose—that is the purpose that is specified in the maxim. Since he wills to act on his maxim, this means that his purpose will be frustrated. If this interpretation is correct, then it is essential that in testing maxim.s of actions the purpose always be included in the formulation of the maxim. (Korsgaard 1996: 92) The maxim of paying a subsistence wage could have the purpose of helping persons, whose lot is among the very worst, have some means to use their rationality to achieve "moral perfection" (as discussed above). (Other purposes might also be plausible, but any such purpose would seem to be directed at assisting these persons in some way.) Will this very purpose be frustrated by the universalization of the maxim to pay a subsistence wage? BUSINESS ETHICS QUARTERLY There are three cases to consider: the subsistence wage is below, equal to. or above the market-determined wage. In the first two cases, the purpose can be met by universalizing the maxim, but acting on the maxim has no independent effect. The wage arrived at by the market is already meeting the purpose. The only inter esting case is when the subsistence wage is above market levels. When a minimum or subsistence wage is set above the market wage, we argue below (section 4) that the best understanding of the economic literature is that some increased amount of unemployment will result. Assuming, then, that some unemployment will result when a wage above the market level is paid, persons who are unemployed will have even fewer means provided to them under the maxim than they would if they were employed at the market wage. Thus, the maxim contradicts its own purpose, at least with regard to those who remain or become unemployed. It is open to Arnold and Bowie to argue that the maxim should apply only to those who do manage to get employment under it. but we see no reason why those who cannot find work or who lose their jobs should be excluded from consideration. To conclude this section we note that the concept of respect can be explicated in a variety of ways, and there is no obvious limit on the number of ways that respect can be given or withheld. Amold and Bowie argue for an expansive concept of respect; however, persons also show respect when they decide to rely upon agreements to further their life plans and projects rather than on the use of force, and when they reach agreements without deception. Since this minimalist concept of respect is consistent with Hill's arguments, it should be both plausible and attractive to Amold and Bowie's "sympathefic readers" as an altemative. Further, adopting this view of respect keeps the conclusions drawn from the Formula of Humanity consistent with those drawn from the Formula of Universal Law. 2. Coercion Amold and Bowie distinguish between physical and psychological coercion, and they report evidence of both in sweatshop environments. Physical coercion need not detain us. We agree with Amold and Bowie that workers should not be physically coerced on Kantian (or, for that matter, various other) grounds. MNEs and their subcontractors and suppliers should not use physical coercion; and we accept that there are Kantian reasons for MNEs not to contract under circumstances in which the employees of their subcontractors and suppliers are physically coerced. Regarding psychological coercion, Amold and Bowie give three conditions as definitional: (1) the coercer must have a desire about the will of the victim; (2) the coercer must have a desire to compel the victim to act in a way that makes the coercer's first desire efficacious; and (3) the coercer must be successful in getting the victim to conform (Amold & Bowie 2003: 229). They make clear that a person who simply makes a choice that is not very desirable is not coerced by the lack of good options. Thus choosing to work in a sweatshop because the only alternatives are worse does SWEATSHOPS: KANT AND CONSEQUENCES not, by itself, on Arnold and Bowie's account constitute psychological coercion. However, Amold and Bowie hold that psychological coercion does occur when: a worker is threatened with being fired by a supervisor unless she agrees to work overtime, and when the supervisor's intention in making the threat is to ensure compliance. (Arnold & Bowie 2003: 230) We will accept this account of psychological coercion (if only for the sake of the argument), but not that Amold and Bowie have given a clear example of such coercion. For some action X. it could well be the case that a supervisor making such a threat is acting coercively, but this does not fit well when X is replaced by "overtime" (or even "extensive overtime") in the context of sweatshops. We assume that the practice of overtime is understood by prospective workers; they might prefer not to work overtime and especially not the overtime that is actually demanded of them. However, this simply makes their choice of a sweatshop that requires overtime less desirable than it might otherwise be. To the extent that overtime is routine, the supervisor's request is not a threat, but simply a statement of the conditions of employment. Workers who are acceptable to management are those who will work overtime, and unacceptable workers may be fired (or are never hired in the first place). Failure to observe this distinction would collapse Arnold and Bowie's account of coercion into a "bad-altematives" account, which they seem to reject. In the case of a routine job practice X, the supervisor need not have a desire to compel a worker to do X. although the supervisor might well prefer that the worker doX to save the expense of finding a new worker. The desire of the supervisor may simply be that some worker or other do X. Now, a particular—less ethical—^supervisor might find more satisfaction or enjoyment in a situafion in which overtime was routine than one in which it was not. Perhaps such a supervisor satisfies Arnold and Bowie's conditions for psychological coercion—we are not sure. However, in the case of a routine practice, this would simply mean that their definition of psychological coercion was at odds with their claim not to accept a "bad-altematives" account of coercion. 3. Minimum Wages: Basic Economic Theory Standard economic theory states that, in a competitive situation, a firm will react to paying a wage that is above market levels by reducing the number of workers it employs. The reason for this can be seen in Figure 1. which relates the wage paid to the quantity of labor employed by a firm using the Marginal Revenue Product of Labor (MRP,) curve. The MRP, curve represents the marginal value, i.e., incremental revenue, to the firm of a one unit change in labor input. Possible wage levels are horizontal lines that will intersect the MRP^ at some point; one of these is W^ (a hypothetical market wage rate). The quanfity of labor that the firm will employ is given by the x-coordinate of this intersecfion point. Because the MRP^ slopes downward from left to right over the relevant range.'- raising the wage BUSINESS ETHICS QUARTERLY level pushes the intersection point to the left, thereby indicating that less labor is demanded by the firm. Figure 1 Money Wage Employment If the subsistence wage, W^. is at or below W^^., paying a subsistence wage will not affect employment. However, in this case, a firm is already doing more than is required by a putative duty to pay a subsistence wage. A duty to pay a wage above W^. will, however, result in the firm attempting to increase its profits or decrease its loss by reducing its use of labor. This is because with W^ above W^,. labor in excess of E^ costs more than the value it provides to the firm. A firm that pays W^ > W^. in order to meet a duty to pay a subsistence wage will be employing fewer workers than it otherwise would be if it paid W . Two important assumptions must be examined. One is that worker productivity would not be increased if wages were increased. If paying wages above some level made it possible for workers to produce more, the position of the MRP, curve would shift to the right. This is the case of the so-called "efficiency wage" issue, which we address below. The second assumption is that the marginal expense of labor (ME,^) curve, which is equivalent to a wage line such as W^ in Figure 1. is horizontal. This implie.s that the firm can hire as much labor as it needs without having to pay more for additional amounts of labor. We believe that this assumption is valid for most situations in the Third World, where unemployment is high. For completeness, however, we need to consider the case where the marginal expense of labor slopes upward from left to right. This situation is shown in Figure 2. Now when additional amounts of labor are hired, the firm must contend with the fact that wages must rise to attract these amounts. The level of employment, E^, SWEATSHOPS: KANT AND CONSEQUENCES will be determined by the intersection of the ME^ curve with the MRP, curve. At levels of employment less than E^, the firm could increase its profit by hiring more workers, since each would make a greater contribufion to revenue than each would add to total wage costs. At levels greater than E^ the additional contribution from hiring another worker would be less than the additional cost. Because we assume the firm pays all workers the same wage, the wage that corresponds to E^^ is not determined by the marginal expense of labor, but by the average expense. Thus, the corresponding wage, W^. is found by using the average cost of labor curve. Figure 2 Money Wage Average Cost of Labor W. Employment In this situation there is some flexibility to raise the wage above W^ without reducing employment. The level of employment will not be reduced below E^ until the wage that is paid rises above W^^. This is because it is the ME, curve (in conjunction with the MRP, curve) that determines the level of employment. We draw attention to this possibility in order to highlight the neutral role that economic theory plays in this debate. Should Figure 1 be relevant, unemployment must be a concern and. in particular, our argument using the Formula of Universal Law has the needed support. However, if it is Figure 2 that is relevant, our Universal Law argument might fail, and, additionally, Arnold and Bowie have some room to rebut consequentialist objections to their argument.'* We believe that it is Figure 1 that applies most often in developing economics where substantial surplus labor is available. Further, unless the MEj curve is steeply sloped, the gap between W^ and Wj, is small. The practical difficulties of knowing if a given wage is actually above W,. are great, and a decent respect for the plight of the unemployed should argue for great caution in claiming a wage above W,^ ought to be paid. Epistemic BUSINESS ETHICS QUARTERLY limitations can interact with moral requirements in unfortunate ways. Nevertheless, we wish to be fair by indicating how standard economic theory might conceivably be helpful to Arnold and Bowie's argument. In fact, however. Arnold and Bowie do not rely upon such standard theory, but instead refer to some recent results in the empirical economic literature regarding minimum wages, and it is here that we will next turn our attention. 4. Minimum Wages: Empirical Studies We are concerned that the review of the minimum-wage literature featuring material and summaries from studies by Card and Krueger (1994, 1995), Freeman (1997). and Spriggs and Schmitt (1996) offered by Amold and Bowie may give the reader a misleading impression of the impact of higher minimum wages on less-skilled workers. We point out that it is Arnold and Bowie who have opened the door to a considerafion of this literature, which they include presumably to rebut claims that a duty to pay a subsistence wage might have a negative effect on employment. Much of this literature does not deal with the cases that are most relevant to a discussion of sweatshop labor in the Third World. In particular it can be objected that those studies that focus on teenage employment in the U.S. may not be especially relevant to unskilled workers in the Third World.'^ Nevertheless, it is such studies on which Arnold and Bowie rely in their argument. We beg the reader's indulgence as we canvass the relevant literature perhaps in somewhat more detail than previously in this debate. In their broad review of recent empirical research on the impact of minimum wages on the labor market status of less skilled workers, Ehrenberg and Smith (2003) offer a review of empirical minimum wage studies. They suggest that there is not a consensus on the effect of higher minimum wages on teenage employment in the fast food sector, but "recent research on .. . overall teenage unemployment, however, finds that there have been negative employment effects associated with increases in minimum wages" (Ehrenberg & Smith 2003; emphasis in original). The labor market status of teenagers is critical in evaluating adjustments in the minimum wage in the U.S. labor market because teenagers, as a group, tend to be relatively low skilled. Policy advocates who call for increases in wage levels in developing countries need to pay particular attention to the impact of such measures on the large numbers of low skilled workers in those countries. A number of issues and methodological objections to the Card and Krueger studies have been raised which cast some doubt on the generalizability of their results. Moreover, in recent years the controversy initiated by Card and Krueger has prompted a substantial number of studies that have produced results contrary to those of Card and Krueger (1994. 1995). Neumark and Wascher (1995) and Burkhauser, Couch, and Wittenburg (2000a) indicate that measurement error may play a role in generating Card and Krueger's anomalous results. Neumark and Wascher (1995) further suggest that although SWEATSHOPS: KANT AND CONSEQUENCES the reduction in total teenage unemployment from a higher minimum wage may be modest, there is evidence that the higher minimum wage leads employers to discharge many teenage workers in favor of other "higher quality" teenage workers, many of whom are induced to leave school to accept those jobs. Neumark and Wascher also find that many teenagers leave school in response to the higher minimum wage, but do not find jobs. The issue of which segmentsof the labor force are most affected by increases in the minimum wage is also taken up by Burkhauser, Couch, and Wittenburg (2000b). They conclude that the most vulnerable groups within the labor force bear the greatest burden of increases in the minimum wage as the "largest [disemployment] effects are observed for young adults without a high school degree, young black adults and teenagers, and teenagers" (Burkhauser et al. 2000b: 30). The Baker, Benjamin, and Stranger (1999) study of the effect of minimum wage changes in Canada indicates that because employers may adjust their staffing levels once a minimum wage change has been announced, but before it goes into effect, simple before-and-after studies of the impact of higher minimum wages (such as that of Card and Krueger) may be misleading and that longer term studies yield a more negative measure of the impact of higher minimum wages on employment. This conclusion is also supported by the research of Burkhauser, Couch, and Wittenburg (2000a) and Bellante and Picone (1999). The importance of a longer post-intervention study period is also reinforced by the research of Partridge and Partridge (1999b) who further find that some sectors of the economy are more able to adjust to a higher minimum wage than others. Partridge and Partridge focus on the low-wage retail sector. Their results, utilizing a two-year post-intervention period, suggest that a 10 percent increase in the state minimum wage is associated with a 1 percent decrease in total (not just teenage), statewide retail employment. They find evidence that a given state that raises its minimum wage above the federal level induces firms to relocate to other states. In a separate study. Partridge and Partridge (1999a) find that states which increase their minimum wage relative to the federal level or increase the coverage of their minimum wage program are positively associated with higher statewide long-term unemployment rates (a long-term unemployed worker is one that has been continuously seeking a job for at least twenty-six weeks). Additional analysis has been published recently by Neumark and Wascher (2004). They utilized pooled cross- section time series data for seventeen OECD countries from 1975 to 2000. Although they find a statistically significant adverse effect on youth unemployment resulting from minimum wage increases, those effects were found to be stronger in those nations with more restrictive labor standards and broader union coverage. The results of a study of the effect of higher minimum wages (and broader coverage of the minimum wage) in Puerto Rico by Castillo-Freeman and Freeman (1992) suggest a focus on the effect of higher minimum wages in the United States, where there is a substantial gap between minimum wage levels and average wage levels, may offer underestimates of the effect of higher minimum wages in BUSINESS ETHICS QUARTERLY economies (such as are found in developing nations) where the wage gap is smaller. Castillo-Freeman and Freeman found that a higher minimum wage was estimated to have a significant impact on total (not just teenage) employment, which, in tum. led to greater out-migration from the island. This finding that the minimum wage can produce even larger adverse effects on employment in developing countries is echoed by the research of minimum wage impacts in various Latin American countries done by Maloney and Mendez (2003). Ressler. Watson, and Mixon (1996) showed that a focus on the employment effects of higher minimum wages may obscure the effect of such mandates on hours worked. Their findings suggest that the response of employers to higher minimum wages may be to reduce the hours worked of teenagers. This finding is reinforced by the research of Katz and Krueger (1992). Michl (2000). and Zavodny (2000). Finally. Burkhauser. Couch, and Wittenburg (2000a) direct fundamental cridcisms toward the statistical and analytical methods utilized by Card and Krueger. Burkhauser. Couch, and Wittenburg (2000a) provide evidence that Card and Krueger (1995) incorrectly construct the variable accounting for changes in the federal minimum wage in their statistical model. 5. Efficiency Wages As mentioned above, one important assumption in our argument is that so- called "efficiency wages" do not play a substantial role. We believe that Arnold and Bowie's analysis of efficiency wages is oversimplified and potentially misleading. Yes, "economists refer to a wage that if reduced would make the firm worse off because of the decrease in worker productivity as the efficiency wage^' (Arnold & Bowie 2003: 237. emphasis added). It is also the case that one of the conditions that may lead to efficiency wages is poor nutrition inasmuch as an undemourished worker may not be as productive and therefore contribute less output and revenue to her employer. Efficiency wages based on the hypothesis that higher wages lead to better nutrition and productivity have been referred to as "nutritional efficiency wages."'^ Arnold and Bowie state, "Empirical evidence supports the view that increased productivity resulting from better nutrition offsets the cost of higher wages" (Amold & Bowie 2003: 237). To support their view Amold and Bowie cite the research of Bliss and Stem (1978). While we regard the Bhss and Stem research as path breaking and seminal, the empirical part of their research is consistently acknowledged by Bliss and Stem (1978) themselves to be tentative—based on somewhat unreliable data. layered with inferences of uncertain reliability, developed from studies of somewhat insufficient duration and statistical models and tests that were somewhat elementary and not always well suited to distinguishing the causality underlying statistical associations. Further Amold and Bowie do not consider the more recent research on the subject of nutritional efficiency wages. Strauss and Thomas (1998) do a comprehensive literature review of the substantial number of studies related to SWEATSHOPS: KANT AND CONSEQUENCES the nutritional efficiency wage hypothesis. Strauss and Thomas report on the various studies whose results are both consistent and contrary to the nutritional efficiency wage hypothesis and suggest that there are sdll many data problems, problems with the conceptual and statistical design of many of the research studies and difficulties in determining the causal link among interrelated variables such as wage rates, income, health status, nutrition, resource allocation within the family and worker productivity. Given these problems, Strauss and Thomas offer this summary of the literature: "The evidence in support of the [nutritional efficiency wage] hypothesis is thin" (Strauss & Thomas 1998: 811). The broader literature as to whether efficiency wages affect the wage levels of workers in industrialized labor markets is somewhat more supportive of the efficiency wage hypothesis.'*' However, there are several contrary studies that suggest that the efficiency wage hypothesis is not useful in explaining wage patterns." If one accepts the findings of the latter studies, i.e.. that efficiency wages are not relevant in wage determination, then increases in the wage rates such as advocated by Arnold and Bowie can be expected to increase unemployment and raise the cost to MNEs of establishing facilities in developing countries. Alternatively, the former studies offer statistically significant evidence that, in certain situations, firms will voluntarily pay wage levels above the competitive market level when such efficiency wages induce the corresponding increases in worker productivity or reductions in payroll costs. In such cases, it appears that simple instmmental rationality without Kantian input is sufficient for efficiency wages to be paid. Against this evidence, Amold and Bowie offer anecdotal research done by an El Salvador government ministry (Republic of El Salvador 2000) whereby some of the production managers interviewed report that American and Asian productivity levels are applied to production facilities in El Salvador despite differences in nutritional conditions and technical capacities of the workers. We are also offered the assurance of Amold and Bowie that "such erroneous assumptions may be widespread among MNE managers" (Amold & Bowie 2003: 238. emphasis added). The basis for this assurance, the likelihood that this practice is widespread and the reason why such managers would act in an irrational (profit decrementing) fashion are not explained. Conclusion We have explored Arnold and Bowie's claim regarding a duty of MNEs or their managers to ensure the payment of subsistence wages by their subcontractors and suppliers, and conceming the use of coercion by these same groups. With the exception of physical coercion, we find that their rafionale. based on the Formula of Humanity, is insufficient to establish the duty they state. In particular, a duty to pay above-market wages does not follow from the arguments they present. Nor, even if it did. should the reader, based on current economic research, be unconcerned that such a duty would not work to worsen the situation of the least advantaged workers. BUSINESS ETHICS QUARTERLY Notes 1. We do not contest this claim. 2. We will not treat working conditions separate from wages. Our justification, apart from space limitations, is that many attempts to improve working conditions would increase costs of labor, and so have much the same effects as raising wage levels. However, we have no intention to argue that working conditions should not be improved if this can be done at no cost or at a net economic benefit. 3. The Restatement of Agency (2d) lists ten conditions to be considered when determining if an agent is a servant or an independent contractor. We believe that the.se conditions clearly mark subcontractors and suppliers of MNEs as independent contractors, but since Arnold & Bowie do not attempt to support their claim regarding respondeai superior in any detail, we spare the reader an item by item examination of the conditions in favor of the commonsense argument in the text. See American Law Institute (1958). 4. This point was suggested by an anonymous reviewer. 5. See especially chapter two. We will not treat the argument in Bowie (1999) separately. We find it most persuasive in dealing with the prohibitions on coercion and deception, which can be observed negatively. Bowie's argument for duties to take some positive action is on a par with the one we discuss below. 6. We will discuss "psychological" coercion, another element of Amold and Bowie's argument, below. 7. See the "Coercion" section below. 8. Arnold and Bowie's concem with consequences at the end of their paper could perhaps be viewed as intended to rebut a claim that the principle "ought implies can" would be violated by their conclusions regarding duties. However, at this stage in their argument, the duties (oughts) they call for have not yet been established. 9. This claim actually constitutes their third argument, which we handle here in terms of individuals. The implications for companies are treated below. 10. Since Arnold and Bowie are not urging that we adopt Kant's complete .system of philosophy, but only drawing out what they take to be implications of the Formula of Humanity, their argument is convincing only to the extent that any ethical elements they introduce are linked to this formulation. 11. We do not contest that persons can have special obligations as the result of voluntary choice, such as the choice to make a promise. Employers should of course keep their promises; many reasons. Kantian and non-Kantian, can be given for this. The challenge is to show that simply being in a certain (unchosen) circumstance can create a duty. Even here, we do not necessarily claim thai there are no such duties, but only that Arnold and Bowie owe the reader an explanation of how such duties follow from the Fomiula of Humanity. 12. The justification for this and other claims made in this section can be found in virtually any labor economics textbook. See, for example. Ehrenberg & Smith 2003. 13. We say "some room" because a putative duty to pay above-market wages would also affect the decision.s of an MNE regarding investments or contracting in the Third World, with subsequent effects on employment. 14. This point was rai.sed by an anonymous reviewer. 15. Efficiency wages may also ari.se when employers are concemed about employee shirking. A worker receiving an efficiency wage (a payment above the competitive market rate) would have more to lose by not applying herself and would therefore work harder, thus justifying the higher wage. Likewise, efficiency wages may result in an improved level of morale and hence SWEATSHOPS: KANT AND CONSEQUENCES greater productivity. Further, efficiency wages may reduce the quit rate among workers, generating a saving for employers in terms of reduced recruitment and training costs. Also, efficiency wages may allow the firm to attract a larger pool of job applicants from which more suitable and more productive hires can be made. The term "efficiency wage" arises from the possibility that in these circumstances it may be rational for the employer to increase the wage above the competitive market rate as long as the value of the extra output induced by the higher wage (or the reduction in labor costs, perhaps as a result of reduced turnover) exceeded the additional payroll costs of the higher wage. For a more complete discussion of efficiency wages, see Borjas 2005: 463-72 and Ehrenberg & Smith 2003: 359-62. 16. For example, studies by Campbell (1993), Cappelli & Chauvin (1991), Gera & Grenier (1994), Krueger (1991). and Walsh (1999) offer empirical support for the efficiency wage hypothesis. 17. For example, studies by Huang, Hallam, Orazem, & Patemo (1998). Keane (1993), and Leonard (1987) offer empirical evidence contrary to the efficiency wage hypothesis. References American Law Institute. 1958. Restatement of Agency (2d). St. Paul, MN: American Law Institute Publishers. Amold, D. G.. & Bowie. N. E. 2003. 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