Economics 101: Taxes, Minimum Wages, and Why You Shouldn’t Boycott Sweatshops
Here are a few gems I dug up from my Economics 101 notebooks. These were the original concepts which drew me to economics. The concepts show that people are complex, and policies are not black and white. They have ripple effects which must be thought out. Sadly, most politicians do not think past stage one. Minimum wages sound nice, but what happens after you impose one? Boycotting sweatshops seems moral; it is undeniable that we all frown upon human beings working long hours for little pay. But what happens when we actively boycott sweatshops?
Simple economics has a few choice things to say about minimum wages. Take a look at the graph below. We have a supply and demand graphed on an x-y coordinate plane (back to fifth grade!). In this case, suppliers of labor are workers and demanders of labor are firms. Price (or wages) is on the y-axis and quantity of workers is on the x-axis. There are sound mathematical theories about why demand is downward sloping, supply is upward sloping, why equilibrium is achieved at intersection, etc. We won’t get into it…
If there is no government interference, supply and demand equilibrate at their intersection. Firms pay a wage of Pe and hire Qe amount of workers. When the government imposes a minimum wage, it effectively places a price floor in the market (the horizontal line PMin), below which the price of labor cannot fall. Equilibrium is not achieved. At PMin (the minimum wage), there at Qs amount of workers willing to work, but only Qd workers are demanded. The difference between Qs and Qd is the unemployment which results from a minimum wage. With an imposed minimum wage, workers are payed a hire wage of PMin, but there are fewer workers hired. This should make intuitive sense, a minimum wage increases the input costs of firms, which means they hire fewer workers to cut costs. Now, think about who is most hurt by the minimum wage. It increases the costs of hiring the least qualified people. Firms, who were once willing to hire unskilled workers for low wages, will no longer be hiring them at all. Their productivity does not match the imposed higher wage. There is a clear trade-off here and any politician who advocates for a minimum wage must present reasons for valuing a higher wage over higher overall employment.
Here is a similar supply and demand graph depicting the effect of taxation. However, this graph is depicting the supply and demand of a certain good, not of labor. Unfettered, the market for this particular good clears at price Pe, selling Qe of the good. Let’s say the good is bubble gum. The government imposes a 50 cent tax on bubble gum which is shared by the consumers and producers. The amount of the tax is represented by the length of the vertical green line going from the supply curve to the demand curve. If evenly shared, consumers see a 25 increase in price of bubble gum and producers see a 25 cent drop in prices. Consumers pay more for bubble gum and producers sell at a lower price while the government collects a tax revenue, graphically represented by the green box. Unable to sell at a higher price, the supply line shifts from S to S1, bringing quantity produced from Qe to Qt. All else equal, a standard tax increases prices for consumers, lowers revenue for producers, and decreases the amount of the good available in the market.
Recently, Apple has come under scrutiny for utilizing low-wage Chinese labor in production. Let’s suppose that a movement develops across the majority of U.S. campuses which protests Apple. They are appalled that workers in China are working in comparably worse conditions for comparably more hours. This movement encourages a boycott on Apple products. Graphically, this shifts the demand in the product market, shown above, from D to D1, meaning that for every given price, people are willing to buy fewer Apple products. This lowers price from Pe to Pp and Qe to Qp. Now, how does this affect the workers in China? Apple’s demand for labor is a function of the price of its product and the productivity of the labor itself. If either the price or the productivity decline, so will Apple’s demand for labor. As shown in the product market, the boycott does indeed decrease the price from Pe to Pp. So, Apple’s demand for labor is also weakened and shifts from D to D1 in the labor market (by the same amount of the price shift). Consequently, there is a lower wage (Pp) and lower quantity employed (Qp) in the labor market. Paradoxically, boycotting Apple products prompts Chinese factories to fire their workers and pay remaining workers a lower wage.
From this explanation on economics, one can conclude boycotts on sweatshops would be counterproductive from a practical standpoint.