Is It Better to Outsource or Insource T-shirts?

Supply and Demand: Who Responds to Fair Labor Practices?

May 10, 2013 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Environment, International Trade and Finance, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 399 Views    No Comments

The Bangladesh building collapse tragedy led me to 3 types of news articles. I wonder what the impact is when you combine them. Please let me know your opinion.

1. Suppliers: Low Cost

  • The cost attraction of Bangladesh has been tough to resist. At $40 a month, the average Bangladesh worker gets one-quarter of the Chinese entry level wage. Add to that an EU loophole that eliminated duties on imports from Bangladesh and the incentive to produce there multiplied.
  • You can see why Benetton, facing price competition from H&M and Zara, started using factories in Bangladesh. Even when they placed an order with an Indian contractor, he did some of the manufacturing in Bangladesh. In a 2012 report, McKinsey called Bangladesh the “next hot spot” for manufacturing.
  • Now, responding to the outcry, firms are saying they will not use their Bangladesh facilities. However, in an NPR interview, a worker advocate in Bangladesh emphasized that she did not want jobs to leave her country. Her people needed the work.

2. Consumers: Low Prices

  • Bangladesh is one reason shoppers believe there is a $5 t-shirt and a $6 bikini waiting for them. Commenting on the tragedy in Bangladesh, one Primark London shopper said, “They definitely need to improve, but I’ll still shop here. It’s so cheap.”  Another shopper, also at Primark, said, “If prices went up I wouldn’t buy from here.”

3. Fair Trade Labels: New Incentives

  • Researchers from Harvard and MIT concluded that even at outlet stores where they expect affordability, certain consumers are willing to pay more for ethically made clothing. Using data from 111 Banana Republic stores, researchers chose 3 products: A $130 woman’s linen suit, a $12 men’s T-shirt, $18 yoga pants. Buyers of the linen suit were willing to pay $18 more for a fair labor standards label. However, people purchasing the cheaper items were not influenced by elevated labor standards.
  • I suspect here, we are looking at price elasticity of demand. With higher prices leading  to considerably fewer purchases, the demand is elastic for lower priced items. On the other hand, people purchasing a more expensive item demonstrate more inelasticity. For them, a relatively substantial price hike does not affect buying behavior.

So…

We have cheap production costs, low retail prices and burgeoning ethical incentives. How will supply and demand respond?

The World's Leading Clothing Exporters from WSJ.com

The World’s Leading Clothing Exporters from WSJ.com

Sources and Resources: Each of my articles ideally conveyed the incentives to which producers and consumers are responding. Bloomberg (quotes source) and the WSJ (graph source, above), here and here, conveyed the cost incentives while the NY Times optimistically (and perhaps unrealistically) presented a burgeoning response to fair trade publicity. You might want to ground all the news articles with these two studies that display for Banana Republic and fair trade coffee what we really buy rather than what we say.

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