Changing systems results in bigger benefits

I’m currently listening to E. F. Schumacher’s book Small is Beautiful: A study of Economics as if People Mattered. It’s a collection of essays published in 1973. In it, he talks a lot about how investing in smaller, perhaps even less modern technologies and policies can be better in many communities because they require less to implement and put fewer people out of work. In his discussion, he argued that foreign aid dollars would be more impactful if they were applied differently to help develop appropriate skills rather than bringing in the materials and skilled workers that are required to operate the bigger and newer technologies.

As a result of Schumacher’s arguments, I read Distelhorst and Shin’s (2023) article about interventions in the supply chain by fashion retailer H&M with a different lens than I might have done previously. Responding to public and activist pressure, H&M asked its suppliers to implement two programs. While the overall goal of the programs was to increase wages, the programs targeted this goal in an indirect way. The first focused on increasing worker awareness regarding their rights and created formal opportunities for conversation between workers and management. The second program included increased tracking and transparency including clear established pay grids based on education, experience, skills, and performance.

H&M’s original investment worked out to be about $1.62 per worker per year. But by focusing instead on implementing both education and transparency worker wages increased by an average of $44 per year after three years. This means that investing in the programs was significantly more beneficial to workers financially than if H&M had simply funded pay raises themselves.

There should be questions at this point. Were there massive layoffs to accommodate higher pay? Nope. Were there less overtime payments? Nope. Did the companies have to raise prices to accommodate? Nope, prices remained competitive. What did happen was increases in the number of orders for all companies that implemented the programs.

The researchers couldn’t identify how exactly the wage increases were covered. Anecdotally, they found that increases in productivity tended to cover the higher wages.

I think that this project is in keeping with Schumacher’s arguments. H&M could have just given their investment dollars to the 1800 factories in 9 countries to apply directly to wages. Instead, they focused on helping workers develop new knowledge about their own rights and opportunities within their local environment. This, over the long run, had significantly greater impacts. But it took time to create a positive impact. This can make it hard to stick to an approach like this. Many people need help now. But Schumacher points out that help like what would have been done by H&M funding wage increases would make the companies and the workers dependent on external sources to maintain that increase. Instead, by changing the system, the increase is hopefully self-maintaining.

The outstanding question I have is did the education have any impact on the rest of the community? In other words, did the workers share what they had learned with others? And did that impact any other businesses in the area?