The Lump of Wages fallacy

Matt Yglesia falls into the classic trap for tough-minded liberals who want to demonstrate that they have a good grasp of economics: the lump of wages fallacy. This fallacy is especially erroneous when applied to to sweatshop wages, yet it is frequently trotted out to attack those who want to institute the most minimal protections and standards for the workers in third-world countries.

There are two sets of competitive forces at work here which we must keep separate. The competition between poor countries is an all-too-real race to the bottom and it would indeed be most imprudent for individual third-world states to impose tough labor standards as companies will simply take their factories elsewhere. But the second set of competitive forces, the one that Matt cites when he says "closing down the sweatship option would seem to just force everyone to stick with misery" is simply a chimera.

It's true. In a perfectly competitive market, if wages go up then demand goes down. But if that's what we have today, then we wouldn't have a stock market to obsess over as profits would be driven down to zero too. Furthermore, such a tiny sliver of the costs of making a pair of pants go towards the seamstresses (compared to shop rent, store clerk wages, management salaries and profit) that even doubling it would not cause one less pair of pants to be sewn in the third world.

If we care for the advancement of poor people all over the world, we should be all in favor of generalized pressure from the consumer's end creating demand for ethically produced goods whereever the factories are. It would have a negligable effect on the volume of commerce to third-world countries because of their decisive advantage in low-cost labor, and jump-start the kind of positive snowball effect of development in 3rd world countries that pro-globalization people enthuse about. If you really need to couch it in economese, think of the decent treatment of third-world workers as an extra feature that is cheap to implement but highly satisfying to altruistic consumers.

As for those who oppose globalization because they think they can keep factory jobs in America, I disagree with them both from a principled and practical point of view. Turning back the clock on trade is something that neither should or could be done.