ASell Global, Pay Local - The Ethics of Taller Product Markets, Lower Labor Markets, and Informed Consent in Global Employment Contracts@

Allen D. Engle, Sr., DBA

Norbert F. Elbert, DBA

Judith W. Spain, J.D.

Department of Management, Marketing, and Administrative Communication

College of Business and Technology

Eastern Kentucky University

Richmond, KY 40475

(859) 622-2359 (Fax)

Contact Author:

Allen D. Engle

(859) 622-6549

allen.engle@eku.edu

ABSTRACT

Globalization of business is a topic filled with potential issues related to ethical concerns. By combining terms, elements and ideas from compensation theory, labor economics and employment law, the authors of this conceptual/review paper present a traditional model of employment exchange between a local employer and local employees.According to the authors, this model provides a significant potential for long term, mutual gains by both parties - at least partially due to generally symmetrical access to information on local labor market (minimum or Afloor@) values and local product market (maximum or Aceiling@) values for labor.A revision of this traditional model is next presented to capture the newer relationship between global or transnational firms and local employees and host governments.The authors point out how asymmetrical information (gathered by global firms on global product market opportunities and global labor market alternatives) has the potential to place global firms at a significant unilateral advantage over the local employees and local governments.By manipulating this information the global firm may: 1) emphasize lower global labor market floors; 2) de-emphasize or ignore information on higher global product market ceilings; and 3) more effectively mobilize technological and process-based substitutes for local labor.The paper concludes with a series of observations on how ethical concerns may be analyzed in the light of these underlying asymmetries of information on labor market conditions and recommendations on how global firms and local host societies may ethically act to provide more balance in increasingly globalized employment exchanges.

INTRODUCTION

Ethics and global business.Can these terms be synonymous or are they diametrically opposed?Is it possible for a global business today to act toward its employees and customers in the same manner as a local, home grown business?Or, perhaps more importantly, why should the global business even try to do so?

It has become almost a cliché to talk about the accelerating pace of change in business.Since

post-World War II financial capital has moved more rapidly and easily across national borders. While it has always been highly mobile, the scale of transfer has significantly increased since the end of the Cold War with the expansion of foreign direct investment (FDI).The average yearly outflow of FDI increased from about $25 billion in 1975 to a record $430 billion in 1998.(United Nations, 1998).Much of the recent increase in FDI is the result of more efficient financial markets.Certainly the dramatic political and economic changes that have occurred in developing nations since the fall of the Soviet Union have made investments more attractive and safer to MNCs. In 1997 alone, 37% of the total global FDI surged into the world=s developing nations. (United Nations, 1998).

The scope of economic globalization embraces the free flow of labor, capital and technology. Because national boundaries and geography are no longer serious constraints to economic, social, and political interactions, democratic societies are more open to the forces accompanying an accelerating rate of change. Except when governments make extraordinary efforts to keep their economies closed, the forces of globalization lead to increasing interdependence and greater competition from abroad. Unlike the old Soviet model, democratic governments are not in control of information, knowledge, skills, nor even trade.

Although nations continue to define the Ahome@ of corporations and attempt to regulate business activities within their borders, governments now have fewer opportunities to influence economic transactions or control the flow of factors of production across political boundaries. (Rosenau, 1997, p. 360-64).One outcome has been an increase in the efficiency of markets, particularly labor markets.

Factors that create efficient labor markets include transparency, availability of substitutes, continuous improvement, openness and connectivity.(Davis and Meyer, 2000, p. 17-20).Transparent markets present all information relevant to a transaction cheaply, immediately, and symmetrically.Labor market information is asymmetric when one party, the buyer for example, has more information about local conditions and substitutes for labor than workers.

One important substitute for labor is the availability of new technologies. Technology has far reaching ramifications as a substitute for labor.It is altering the structure and the location of employment, the creation of newer technologies, the patterns of trade and FDI, and the economic opportunities in and among both developed and developing countries.By accelerating the flow of information across national borders, making collaborators and competitors abroad aware of new processes and products, there will be fewer opportunities for unskilled labor to successfully negotiate living wages and safe working conditions.And without government intervention or local social agencies the bottom floor on wages is lowered.

For labor markets to be efficient, the value of labor must reflect the skills, knowledge and experiences most needed at a point in time. But rapid change means quicker obsolescence, and a need to continuously readjust the market value of people.Continuous adjustment of the price of labor is fundamental to creating efficient markets.An example is the NBA.While the lowest paid NBA rookie certainly does better than their counterparts did ten years ago, the widening disparity between the bottom and top players vastly exceeds what it was in 1975. (Organ, 2000, p. 1).

In a fluid labor market desired skills / knowledge / experiences are sought after through open bidding processes, thus driving up or down the final wage outcomes.The events in the outside world permeate through every company.Connectivity attaches everyone to the marketplace.The result is that the traditional factors of production that companies use to make things are increasingly obtained Ajust in time@ in the marketplace.Now it is common to hear of organizations slimming down to just their core competencies, keeping only the functions that are unique and add value to the bottom line.Even GM is selling off many of their component=s facilities rather than owning Ajust in case.@Workers are being displaced, even those with professional skills, resulting in a fast growing sector of self-employed independent contractors.

In addition, connectivity-- hooking up everybody and everything electronically-- has made distance and geography irrelevant.Information on almost anything is available, quickly and effectively, through the Internet.Connectivity increases efficiency by eliminating intermediaries between buyers and sellers and allowing them to create meaningful transactions.Finally, efficient labor markets are open to anyone and everyone, including people from outside traditional sources of labor.Immigrants, expatriates, as well as temporary workers contribute to improving symmetry between buyers and sellers of labor.

Globalization represents the most fundamental shift in political and economic arrangements since the Industrial Revolution and MNCs are the dominant institutions directing this shift.Seventy percent of global trade is dominated by less than 500 corporations.(Hill, 2001, p. 8-24).This shift carries with it costs that are just beginning to be recognized.There are growing social contradictions being created by the increasing income gap between the world=s poorest and richest nations, as well as the increasing gaps between the poor and rich within these nations.There is no doubt MNCs that depend on labor either as a source of competitive advantage or as a critical factor of production chase low wages to the world=s poorest countries, collaborating with the governing elites in those countries to extract cost advantages.

We propose that multinational corporations, who have acquired competitive intelligence on global product market opportunities and global labor market alternatives, have the potential to gain a significant unilateral advantage over the local labor force and local governments.Labor-intensive industries, in order to remain competitive, gravitate to countries where workers= wages are lower. The countries are oftentimes poor, with governments often Agiving away their precious human resources@ as an incentive to attract FDI.Many of these countries, such as China, discourage or outlaw collective bargaining efforts.This government position makes it difficult, and in many cases impossible, for workers to organize free unions apart from government-sanctioned arrangements.Labor struggles throughout history have only succeeded when collective action has occurred in both the industrial and political arena, so it is probable that particular pattern will continue when the conditions allow it.Unfortunately, prevailing traditions, laws and governments in many developing countries discourage the basic rights of free assembly and collective bargaining in good faith.It might be argued that the global economy, rather than raising the quality of life of everyone, encourages poor countries engaged in competition for FDI to drive down or suppress wages, thus,denying workers a fair share of the new wealth they are creating.

Developing countries are under increasing pressure to keep their minimum wages low as possible to complete for foreign direct investment.For example, in Mexico real wages have fallen 25-40% in the 1990s, and the minimum wage, when it is paid, has fallen to 45 cents an hour. (Faux, 1997,p. A19).Similar downward movements in minimum wages have also been observed in the poorest countries of Central and South America and Asia.The downward spiral of wages in the garment industry can also be seen in the case of El Salvador.While exports from El Salvador to the U.S. rose from $10.2 million in 1985 to $398 million in 1994, real wages in El Salvador fell 53% during that same time period to a low of 56 cents per hour, a wage that provides only 18.1% of the annual basic needs of a family of four. (Faux, 1997).Even in the U.S., the richest country in the world, the cash earnings of the poorest one-fifth have dropped 9% since 1977. (Organ, 2000, p. 1). 

The low wages paid in developing countries is an issue attracting much attention among politicians, organized labor, human rights and religious activists in the developed nations.Certainly there is the fallout from the massive relocations of manufacturing jobs in developed countries to developing countries as companies choose to move their operations overseas.Furthermore there is the increasing competition among developing countries, each offering the Acheapest@ labor as an incentive to relocate, often driving down already pathetic wages. Political leaders, such as Mexico=s President Vincente Fox, have become painfully aware that the viability of their national economies depends increasingly on Mexico=s substantially lower wages.After a decade long boom in maquiladora employment, foreign companies have begun to cut the number of workers employed and are moving their factories to even cheaper labor markets in other countries. (Millman, 2001, p. A12).Organized labor faces immense challenges not only from government officials but also from leaders in the poorest countries who view the rhetoric from developed countries about the need to raise wages as a veiled attempt to prevent the loss of even more jobs.

Interestingly, throughout all this growth in society, there has always remained one constant - businesses need employees.Without employees, no business can exist.It is the relationship between the business and their employees that this paper will explore.

A Local BTraditional Model of Employment Exchange

Most US presentations of employment exchanges have focused on the topic of Aequity@B an inherent equality-based ability of the partners to bargain (Mahoney, 1979; Milkovich & Newman, 2002,Chapter 2).We present this exchange in terms of both a horizontal dimension B covering the exchange of valued resources between the organization and the employees (March & Simon, 1958)- and a vertical dimension B capturing the extreme values of resource (the highs and lows, if you will) the two parties are willing to accept (Gerhart & Milkovich, 1992; Milkovich & Newman, 2002).

In terms of the horizontal element of any employment exchange, all exchanges are based on differences in values.Employees value the total reward systems B pay, benefits, opportunity for development and working conditions (the so-called Ainducements@) more than they value their time and efforts (so-called Acontributions@) (March & Simon, 1958; Milkovich & Newman, 2002).Employers, on the other hand, value the employees= performance efforts (Acontributions@) more than they value the Ainducements@ they offer to the employee.In local-traditional exchange relationships both local parties are more or less aware of local alternative employment wages and alternative sources of labor.We will call this awareness of local alternatives Atransparency@ in the exchange.

In terms of the vertical element of any employment exchange B compensation theorists posit that local labor markets create a wage Afloor@ (Gerhart & Milkovich, 1992).You cannot offer less in the way of inducements than local labor markets require to clear the floor (Milkovich & Newman, 2002, p. 200-204).Hence, the vertical lower limit of what employers can offer is bounded by the local/regional supply and demand for labor.

Alternately, theorist point to product demand characteristics as the basis for a product market Aceiling@ (Gerhart & Milkovich, 1992; Milkovich & Newman, 2002, p.210-212).It is illogical to pay more for labor than what you can produce and sell with that labor.

If we sell products in a highly priced competitive market then we cannot pay $20 in labor wages to produce a product that we can only sell for $15.Monopolies, due to technology or other sources, make consumers less sensitive to price increases and we can speak of Ahigh@ product market ceilings. On the other hand, highly price competitive markets make consumers price sensitive and we can speak of Alow@ product market ceilings.

Naturally, other factors may come into play to determine firm-specific demand and supply characteristics as well as the willingness of firms to pay premium prices (Milkovich & Newman, 2002, p.204-210, 212-216).Even so, labor market and product market conditions remain major determinants of the vertical dimension to employment exchanges.

To review, in a traditional model employees exchange their labor for financial inducements in a relationship characterized by relatively symmetrical access to information about local labor market floors and local product market ceilings.Members in these relationships value stability and predictability and many local norms as well as regional and national regulations exist to provide a balance in the bargaining power of both sides. This Traditional Model is presented in Figure 1.

This Traditional Model is characterized by symmetrical information based on a high degree of transparency in operations; scale proportionality B such that collective action by local labor approximates the collective strength of the firm=s size and scope of operations; and legal/regulatory Areferees@ creating socially acceptable rules to the exchange negotiation process.We present that the resulting exchange provides a balance in inducements and contributions between the labor market floor and the product market ceiling represented by point Aa@ in Figure 1.

The authors do not wish to inaccurately present a falsely idyllic view of employment exchanges.Discontinuities due to changes in technologies, changing market dynamics and social political unrest combine with the natural tension of differing values to characterize the traditional model of employment.We do wish to present a model that captures the steady state characteristics of local exchanges based on local bargaining equivalence.

Local-Traditional Model Scenario:

In the 1970s, the local U.S. sneaker manufacturing plant is owned and operated by Mom and Pop Smith.They know their own production costs and have done some research into identifying how much they could charge for their sneakers.Mom and Pop Smith know what their competitors are charging and could make a very close guess as to their production costs.In addition, employees at their plant are aware of how much the other sneaker manufacturers are selling their products.

The owners know all their employees on a very personal level.The employees are paid slightly above the local labor rate in order to maintain a constant and loyal workforce.Unemployment in this area is less than 1%.Fred Jones, head of their maintenance department, has three children and is struggling to make ends meet. He knows he is being paid more than his counterparts in other manufacturing facilities.Fred also knows that the company is operating on a slim profit margin. So, even though Fred would like to ask for a raise, he will not ask for one this year because he would rather keep himself, his co-workers, and friends employed.

INSERT Figure 1 Approximately here

As is evident from Figure 1 and the scenario presented above, the Traditional Model presents atraditional employment exchange between a local employer and local employees.According to the authors, this Traditional Model provides a significant potential for long term, mutual gains by both parties - at least partially due to generally symmetrical access to information on local labor market (minimum or Afloor@) values and local product market (maximum or Aceiling@) values for labor.This balance of information is based on a mutual understanding of local conditions and the long-term capability for local substitutes for labor being offset by local social and political pressure to avoid the extreme or discontinuous substitution of local labor with other factors of production.

One of the key elements in the Traditional Model is reliance by the parties upon the symmetrical exchange of information.This exchange is based primarily upon the premise of contract law.In contractual relations, whether under the Uniform Commercial Code or common law, the parties must have an offer, acceptance, consideration, capacity, and a legal purpose in order to enter into a valid contract. (Corley, 1999).Regarding capacity, the parties must be mentally able to understand the nature of the contract and be physically able to perform it.In the Model, the parties (employer and employee) are able to understand the nature of the contract since both sides have access to the information necessary to enter into the contract.Mom and Pop Smith know the maximum/minimum value of the labor market as well as the maximum/minimum value of the product.Fred Jones knows this information as well.Both parties are operating on a level playing field, with access generally to the same information.

In addition, under UCC or common law, if the parties enter into a contract and one party has done so because of duress (force or threat of force) or undue influence (force or threat of force in a fiduciary relationship), the courts will allow the party upon whom the duress or undue influence has been exerted to make the contract voidable. (Jennings, 2000).This philosophy admonishes the parties not to use an unequal bargaining power to their advantage.Thus, if Mom and Pop Smith forced Fred Jones to sign an agreement that paid him below the local labor wage because they threatened his continued employment with the company, Fred Jones could escape the confines of the contract whenever he so desired.

Obviously, this use of unequal bargaining power is even more highly regulated in the arena of employment law.The Wagner Act of 1935, commonly referred to as the National Labor Relations Act, recognized that the major cause of industrial strife between an employer and employees isthe unequal bargaining power.Through various provisions of the Act, Congress has set forth standards of behavior whichrequire the parties to provide disclosure of pertinent information as well as outlaw certain behavior that had a chilling effect on bargaining.Prior to the Act, an employer would simply set a wage rate and fire anyone who attempted to argue about it or attempted to organize the employees to protest the wages.With the passage of the NLRA, the employee now has the right to engage in Aconcerted activity for the purpose of collective bargaining or other mutual aid or protection@.(NLRA, sec. 7). 

So, in our scenario, Fred Jones could openly discuss wages with his co-workers and they, as a group, could approach Mom and Pop Smith to negotiate a better wage.The Smiths do not have to agree to the proposed wage but, the NLRA allows the employees the right to negotiate without fear of retaliation.Thus, based upon good faith bargaining and negotiation, a fair wage rate is set and the local market value is established and recognized by both parties.

Regarding the second component of the Traditional Model dealing with pricing for the goods, this area is also closely regulated.The Clayton Act of 1914 and the Robinson-Patman amendment to Section 2 of the Clayton Act attempts to eliminate the unfair advantage of a large buyer could secure over a small buyer simply because of their size. The purpose of the Acts isto eliminate practices that would adversely lessen competition or tend to create a monopoly.While the Robinson-Patman is limited to companies dealing with interstate commerce selling goods, this Act does highlight the commitment to the philosophy of informed consent to contract as well as equalization of bargaining power.

Accordingly, under the Traditional Model, the basic premise is free flow of access of information between the employer and employee and the choice to enter into that contractual relationship.This information flow and choice netted the result that both parties believed that they were dealing with each other in an ethical manner, reflecting their commitment to self-worth of the individual as well as the commitment to the preservation of the business.In the words of Stephen Covey, it was a Awin-win@ situation. (Covey, 1989).Our society was comfortable with this premise and the system flourished.

A Global B Revised Model of Employment Exchange

Global firms, as a matter of strategy, constantly scan the planet for changing Afactor conditions@ (costs of labor raw materials, transportation and distribution, production as well as markets availabilityand willingness to pay a premium price for delivered goods and services) in order to maximize returns (Bartlett & Ghoshal, 2000, : Chapter 1).These firms are characterized by a global perspective in all operations combined with highly developed intelligence gathering as well as having information and decision support systems that allow decision makers to accurately scan these global opportunities and integrate activities to take timely advantage of this information (Bartlett & Ghoshal, 2000; Peppard, 1999).Additionally, many global firms have found efficiencies in scale and scope and grown to the point that they control resources greater than many smaller nations.

The enhanced capabilities of these global firms modify many elements of our employment exchange model.First, and foremost, global firms enjoy the benefits of a great deal more information on regional, national and even global sources of labor alternatives along with information on global markets for finished goods and services. This global perspective creates asymmetrical information exchanges between the global firm and the local employees.Global firms may calculatively manipulate this asymmetry of information in order to minimize the information on the global value of goods and service produced by local labor (Aa@ in Figure 2) and/or maximize information on the availability of lower labor costs in other nations (Ab@ in Figure 2).This manipulation can result in Ataller,@ remote product market ceilings B hidden from employees, and Alower@ labor market floors B negotiated after implicitly or explicitly threatening to move operations to remote, lower cost labor market locations (see Figure 2, sections Ac@ and Ad@ respectively).

Second, changes in the scale of operations are such that the global firm=s economic strength, size and scope now significantly exceed the collective strength of the local labor force.This inequality in scale proportionality means that local employees cannot approach negotiations with global firms under any form of equality.The scale of the collectivization of labor has not kept up with the scale of collectivization for the global firm (Hill, 2001, p. 475-478).

Third and finally, the truly transnational scope of the global firm can potentially make their operations extralegal-outside the jurisdiction of traditional regulatory forces.Global firms may readily subvert local, national and even regions, i.e. European Union,regulatory environments and move operations to nations or regions with governments so desperate for investment that they will not impose meaningful employment regulations, even if these regulations are on the books (Bartlett & Ghoshal, 2000, p. 233-239; Hill, 2001, p. 477-478).

The net result of these three categories of changes is a significant imbalance in the bargaining power of the two sides.Wages gravitate toward a new, Alower@ global labor market floor (Ae@ in Figure 2) while at the same time the global firm enjoys the Ahigher@ global product market ceilings and the inevitable globally enriched profits (Af@ in Figure 2).Employees and national governments are powerless to act.

Global Model Scenario: 

Fast forward to the 21^st century.Multi-national companies (MNC) are flourishing.The local sneaker manufacturing plant has been bought by a large retail global conglomerate, Sportswear International, Inc. (SII). The plant that Mom and Pop Smith operated has been shut down.SII=s sneakers and sports line are now being manufactured overseas in Indonesia and in Mexico.The CEO not only knows his own production costs to the penny, but also, through competitive intelligence, knows his competitor’s production costs.

At the plant in Indonesia, Fred has now been replaced by Lin Yee.The CEO of SII has never met Yee and will not likely even step into this particular sneaker manufacturing plant.Lin lives in a country with high unemployment, approximately 20%.He was happy to get this job since it paid the minimum wage.Lin has no idea what his counterparts in Mexico are getting paid for performing the same work.In addition, Lin does not know what the sneakers are selling for in the United States or in other industrialized countries.

INSERT Figure 2 approximately here

The Global Model presents the newer relationship between global or transnational firms and local employees and host governments.The authors point out how asymmetrical information (gathered by global firms on global product market opportunities and global labor market alternatives) has the potential to place global firms at a significant unilateral advantage over the local employees and local governments.By manipulating this information the global firm may: 1) emphasize lower global labor market floors; 2) de-emphasize or ignore information on higher global product market ceilings; and 3) more effectively mobilize technological and process-based substitutes for local labor.The authors suggest this information-based advantage on the part of global firms may be so great as to ethically void the employment exchange due to a fundamental inequality of the parties to knowingly engage in a true contract.

IMPLICATIONS

In the agrarian world, landowners valued laborers within the context of beasts of burden.In the industrial world, owner=s valued workers in terms of the time devoted to manual labor.In the connected economy, people are valued for their knowledge and talent.Perhaps one explanation for the growing disparity between the top and bottom workers can be found in the trend toward more efficient markets for pricing the factors of production, particularly labor.

Today, a firm=s competitive advantage depends more than anything on knowledge.Or, to be more specific, on what it knows, how it uses what it knows, and how fast it can know something new.In fact, knowledge is a factor of production potentially greater than the traditional triad of land, laborand capital.Although globalization has brought historically unprecedented improvements in the quality of life for millions of people, not all countries and their citizens have benefited similarly.

The local, home-grown business has traditionally operated within a box - a confinement based upon a myriad of political, regulatory, and legal considerations.Society accepted these restrictions and based its economy upon them.Our ethics and value system reflect the commitment to these rules and regulations.The relationship between Mom and Pop Smith and Fred Jones has flourished and the strength of that relationship is based upon informed consent, information, and equality of bargaining power.

The global business has arrived and will not be going away.Gone are the days of knowing your employee and facing them at the bargaining table with equal knowledge and power.Gone are the days of the employee knowing the product market and its value. Gone too is the ease in which society regulates the businesses.

The scenario described in the Global Model is of concern on three levels.First, the perceived lack of fairness and voice provided to potentially millions of workers and their families raises moral-humanistic concerns.The quality of life for billions and global justice are not trivial concerns.

Second, from a purely functionalist perspective, a perceived lack of Adue process@ and equity can cause the global firm to operate at less than an optimal level.Unless all regional units sense they can gain from the global relationship, local members may be unwilling to share locally derived innovations and improvements.Competitiveness may suffer in the long term if the firm cannot globally diffuse these locally produced innovations (Bartlett & Ghoshal, 1986; Kim & Manborgne, 1993).

Finally, endemic, long term inequities may contribute to social and political instabilities and increased social and political risks.These risks can more than offset the advantages of local factor conditions such as low cost, skilled labor (Hill, 2001, p. 74-78).These instabilities and risks may be the greatest threat to the global firm B ironically a threat enhanced by the actions of the global strategists themselves.

Solutions to these problems are not readily available.The authors suggest three areas of potential assistance in providing a more equitable balance between global firms and local or regional employee groups.First, national, professional, labor or non governmental organizations (NGO’s) may be able to coordinate international wage and price information so as to make remote product markets more transparent and, at the same time, provide a more balanced, complete picture of more remote labor markets.Web-based information systems may readily facilitate much of the dissemination of this information, yet gathering and organizing and updating such a database remains a daunting task.

Second, issues of scale, scope and the disproportionate size of many global firms must be addressed.Regional and global unions have, as noted earlier, not met with success.Increased efforts in this area, possibly under the aegis of the United Nations or the European Union, may yet yield fruit (Jennings, 2001).

Finally, the ability of global firms to circumvent local and even regional legal systems with the threat of exodus remains the most critical issue.Ironically, local concerns for sovereignty – and an attendant unwillingness to surrender legal authority to regional or global venues of jurisdictions - leaves nations with no “court” in which to claim redress.Only by surrendering sovereignty to global authorities that enjoy wider jurisdictions may local employees be able to successfully redress grievances with global firms and adjust the imbalance described in the Global Model of employment exchanges.

The authors submit that a business should act ethically toward its employees in any type of environment, whether it is a local or global business.Treatment of employees as individuals with respect and dignity is of utmost importance.

Businesses should be challenged to look at their employment costs and their relationship to their employees in the same manner regardless of the physical location of the plant or facility.Businesses can still insure a profit while still acting ethically.It may be more of a challenge to do so. Is not the challenge worth it?If, as a society, we decide to value people differently based solely upon where they live, the authors would question the continuation of stable growth in our society.

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