Saturday, April 24, 2010

Lit in review: Effects of Activism

Harrison and Scorse, "Multinationals and Anti-Sweatshop Activism," AER (2010), Vol. 100, No. 1, 247-273, ungated.

Pro-market-eers claim that people can "vote with their dollars" to express their disapproval of corporate actions and encourage proper actions. How effective is consumer activism in actually changing corporate governance? Harrison and Scorse study the anti-sweatshop movement in the US aimed at Nike, Adidas, and Reebok during the 1990s in Indonesia. Two things happened: the Indonesian government, under some pressure from the US government, raised the minimum wage in real terms; and shops in the textile, footwear, and apparel industry also raised their average wages.

Identification is not based on actual firm ownership or contracts, but the probability of a workshop being targeted is estimated based on census, corporate information, and region. They find that activists were successful in increasing wages in targeted firms: the wage increase was 10-20 percent larger than in foreign-owned firms in other industries and 30 percent larger than other firms in their industry. The increase largely came from greater compliance with minimum wage laws. The employment effects were small - smaller firms left the industry while larger firms did not noticeably change the size of their workforce - but profits decreased significantly.

Among factors they say were decisive is an open political atmosphere and the teamwork between US and Indonesian NGOs. Activism increased both the probability that firms would be detected paying below minimum wage and the penalty for firms that were caught. This was more important for large firms, like the multinationals, for whom bad press meant more. The one downside is that some firms have moved to other countries with lower wages, so the net effect is complicated (negative for people in Indonesia who would have been employed, positive for people in other countries who are now employed, negative for people in other countries now employed under bad conditions). Some criticisms.

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