Recently, during a mass at the Vatican, Pope Francis condemned wealthy employers for paying their workers low wages and accused them of “exploitation”. (Thank you to Matthew Lau for bringing this up in his excellent op-ed in the Financial Post). This is nothing new, given the Pope’s ongoing crusade against inequality and poverty; however, his attack on business is misguided and will make the poor worse, not better, off and therefore, requires an answer.
I agree with Pope Francis that reducing poverty is an important goal but completely disagree with his proposed means. I will present an effective, moral alternative. (As for inequality of income and wealth, I disagree that governments should try reduce and eliminate it. On the contrary, trying to do so by government force will not alleviate poverty but increase it instead, because government coercion will dis-incentivize wealth creation).
So why is the Pope wrong? Why is employment, even at low wages and without a health care plan and pension, not exploitation? What Pope Francis fails to grasp is that exploitation of others is only possible by using physical force. If workers compete for and work at low-wage jobs at factories and elsewhere out of their own choice, without being physically forced to so and continue working in the absence of physical coercion—unlike the slaves in the American South in the past and the victims of human trafficking today—they are not being exploited. They are free to quit and seek better opportunities elsewhere. Many do, once they have managed to save enough to start their own business (the level of entrepreneurship in the developing countries is astonishing) or are able to find better-paying jobs.
This is the way out of poverty. Once workers earn money and gain skills, they can and do move up, and others will take their place. As an example, Matthew Lau cites a World Bank report showing that poverty rates in Cambodia dropped from 53.3 to 20.5 per cent between 2004 and 2011, thanks to industrialization and foreign investment attracted to that country by abundance of cheap labor. This is the pattern elsewhere in Asia and other developing countries. Japan, South Korea and Taiwan were initially low-wage countries. Their place today has been taken by countries such as Bangladesh, China and Vietnam (with the latter two moving out of that category as they industrialize and their level of wealth increases).
A low-wage job does not represent exploitation. It is based on voluntary trade between the employer and the employee. If the employer tries to pay lower wages than what the market (supply and demand) sets, he will lose his workers. If he will pay more than the market wages, he will lose money and his business. If the employer trains his workers more than his competitors do and they therefore become more skilled and productive, he can afford to pay them more—but again at the market rate for such productivity and skill level.
Low-wage jobs in manufacturing and other industries are better for employees than the alternatives, such as begging or prostitution. Employment for women in particular has been important for the opportunities of children to go school, thus improving their skills, employment opportunities, and income levels.
Take the opportunities for low-wage jobs away by restricting foreign investment, imposing minimum wages, and by otherwise regulating free trade between employers and employees—and everyone will be poorer. Companies will create fewer, more expensive material values, and as a consequence, less wealth for their owners. This will result in less investment in further wealth creation, which means fewer jobs and opportunities for poor people to rise out of poverty. It will also mean more expensive goods and services, and less opportunity for consumers, particularly in poor countries, to improve their standard of living.
To reduce poverty, we do not need coercion to make companies to pay higher wages and offer benefits to workers. We need freedom to trade with others for mutual benefit and by mutual consent. Anyone who truly tries to exploit others by initiating physical force should be penalized by the government (whose only role is to protect us against physical force, not to set minimum wages or mandatory worker benefits by employers).
Pope Francis is wrong: businesses offering low-wage employment are not “exploiting” workers and committing a “mortal sin.” On the contrary, they are pursuing their self-interest morally by engaging in free trade, with the beneficial side effect of reducing poverty. For that, they should not be condemned but thanked.