More on the globalisation theme. Does free trade and globalisation, with its accompanying sweatshops, increase incomes and welfare? Is globalisation good or bad for the poor? One would have thought that the rise of China was proof enough to settle the debate.
As low-income countries industrialize, workers choose between informal self-employment and low-skill manufacturing. What do workers trade off, and what are the long run impacts of this occupational choice? Self-employment is thought to be volatile and risky, but to provide autonomy and flexibility. Industrial firms are criticized for poor wages and working conditions, but they could offer steady hours among other advantages. We worked with five Ethiopian industrial firms to randomize entry-level applicants to one of three treatment arms: an industrial job offer; a control group; or an “entrepreneurship” program of $300 plus business training. We followed the sample over a year. Industrial jobs offered more hours than the control group’s informal opportunities, but had little impact on incomes due to lower wages. Most applicants quit the sector quickly, finding industrial jobs unpleasant and risky. Indeed, serious health problems rose one percentage point for every month of industrial work. Applicants seem to understand the risks, but took the industrial work temporarily while searching for better work. Meanwhile, the entrepreneurship program stimulated self-employment, raised earnings by 33%, provided steady work hours, and halved the likelihood of taking an industrial job in future. Overall, when the barriers to self-employment were relieved, applicants appear to have preferred entrepreneurial to industrial labor.
There are three observations
1. This should not be mistaken to posit the debate on development as a choice between "productive wage employment" and "entrepreneurship". We need both, though more of the former than the latter. After all, there are only so many entrepreneurs that an economy can support.
2. This is a very partial equilibrium finding. More specifically, it only tells that in the initial stages of industrialisation, as Ethiopia undoubtedly is at, labor markets can be very exploitative. Further, in such conditions, the private returns on investment may be higher from entrepreneurship than wage employment.
3. However, with time, based on historical experiences of development trajectories in recent decades, a different dynamic emerges. On the one hand, competition, broadening of industrial base, better regulations, and so on contribute to making sweatshops far less exploitative and raises the general income levels. On the other, small entrepreneurship tends to spawn a large and unproductive informal sector.