The business case for humane conditions of work

In a recent survey we conducted of Cambodian factory managers, we found that managers generally think that humane conditions of work improve productivity. When asked the question, ” Do you believe that there is a relationship between productivity and working conditions in this factory?” 75% of managers replied, ” Yes, more comfortable working conditions are linked to higher productivity.”

But when we asked the same managers whether humane conditions of work increased profits, they said no. When we asked the question, ” Do you believe that there is a relationship in this factory between profits and paying workers as promised?” 72% responded, ” No, there‚Äôs no relationship.”

These beliefs are not necessarily inconsistent. Profits can go down as productivity goes up if social compliance is costly.

These manager beliefs are generally consistent with the literature. Osterman (2018) reviewed 25 years of literature on the business implications of the “high road” and found that the high road is more productive but less profitable.

However, we recently completed two pieces of analysis that find evidence for the business case for social compliance. We first looked at whether Cambodian firms that improved social compliance between the first and second assessments by Better Factories Cambodia predicted a subsequent reduced probability of failure. The answer is, yes. Factories that improved compliance related to communication, compensation, information about pay calculations and more humane practices related to termination, discipline, overtime and weekly rest were less likely to close than static factories.

Now, just because social compliance predicts survival, that does not mean that social compliance caused survival. To strengthen our identification, we conducted a field experiment with Cambodian firms between 2015 and 2018.

Over the course of the study, factories participating in Better Factories Cambodia increased hourly pay by 41.1% and reduced work hours by 8.8%. Hourly productivity increased by between 25.6% and 32.7%, less than the percent change in hourly pay.

So far, it looks like manager beliefs are correct. Productivity went up with social compliance but unit labor costs also went up. As a consequence of the presence of Better Factories Cambodia, factories shared productivity gains with workers and, if there was exploitation before participation with Better Factories Cambodia, that exploitation was reduced.

However, we still find that the return to capital also rises as long as labor’s cost share is less than 0.78. The reason is that capital also became more productive. The daily output per machine went up.

So, there is a business case for social compliance, but it is masked by the fact that labor’s share of the surplus earned by the firm is rising.

Osterman, Paul. 2018. In Search of the High Road: Meaning and Evidence. Volume: 71 issue: 1, page(s): 3-34 Article first published online: October 23, 2017; Issue published: January 1, 2018. doi/10.1177/0019793917738757

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