This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting-edge ideas and advice for global leaders about emerging markets.
By Greg Distelhorst (University of Toronto) and Anita McGahan (University of Toronto)
Wage theft—a denial of workers' due wages or benefits, is a remarkably common practice in both advanced and emerging economies. This encompasses underpayment—such as wages below the statutory minimum—uncompensated overtime and demanding off-contract work. In extreme situations, some companies have fostered slavery-like conditions, including well-documented instances within Nestle's seafood supplier network in Thailand.
The Economic Consequences of (In)humane Labor Practices
Some analysts argue that the link between inhumane treatment and lower productivity arises from poor economic conditions. They contend that economic development naturally leads to the improvement of wages and working conditions. Conversely, there is skepticism about the effectiveness of monitoring and codes of conduct in enhancing labor conditions. Additional research indicates a positive correlation between investment in employee training—increasing “human capital”—and worker productivity. This suggests that long-term performance gains are associated with companies that compensate their workers appropriately and provide adequate training. In stark contrast, companies that rely on the “low road” approach often face an increase in product defects and manufacturing disruptions due to their dependence on low-wage, unskilled labor.
Given the likelihood of companies being reticent to disclose labor violations, Distelhorst and McGahan leveraged auditor reports to identify those with poor labor practices. They gathered data from an import-export company that manages the procurement of goods from thousands of supplier factories for hundreds of clients, predominantly retailers and wholesalers in North America and Europe. Their analysis focused on factory audits carried out by the import-export company to assess the occurrence of socially irresponsible employment practices. To ensure the measured productivity was indeed related to labor conditions and not just economic context, they controlled for economic development in their analysis.
Findings show that socially irresponsible employment practices are closely linked within factories, with the presence of any single practice likely to be positively correlated with the presence of all others. Factories that did not establish labor contracts with workers tended to also lack safeguards for employing underage workers, more frequently engaged in unacceptable disciplinary methods like punitive wage deductions, were more apt to compensate workers below legal wage and benefit standards, and often demanded work hours exceeding legal overtime restrictions. Moreover, results from their analysis underscored the ramifications of labor violations: factories with identified infractions exhibited 18 percent lower labor value output and about 3 percent poorer on-time delivery rates, which translates to an annual loss of nearly half a million dollars for factories with average annual purchasing of $2.7 million.
Managerial Implications
Multinational companies play a crucial part in advancing “high road” manufacturing practices that are manifested in observable business strategies such as pricing and production management. Collaboration between manufacturers and their buyers is essential in this effort. To this end, multinational companies will need to recognize problematic practices, as well as identify and promote alternative ones, for example by providing suppliers with process enhancing programs through investments in workforce development. By implementing targeted supplier interventions, multinationals can encourage greater employee involvement and improved compensation, thereby diminishing the prevalence of exploitative labor practices, while at the same time, enhancing productivity, timely deliveries, and profitability.
Original Work
Distelhorst, G., & McGahan, A. (2022). Socially irresponsible employment in emerging-market manufacturers. Organization Science, 33(6), 2135-2158.
Contact
If you are interested in learning more about this work, contact Professor Greg Distelhorst at greg.distelhorst@rotman.utoronto.ca.