Fair Trade: Does It Help Poor Workers?

As part of Everyday Economics, we asked you to tell us what topics you want us to cover. You voted, and from this last round, the second most popular suggestion comes from Elizabeth, who asks, "How does the purchase of fair trade goods affect wages in developing countries?" It's an excellent question. Fair trade is one of several types of activities aimed at increasing living standards in the poorest countries. So let's step back to discuss these issues broadly. Most importantly, it's worthwhile to remember that, although working conditions in poor countries are distressing from a Western vantage point, the jobs that we find objectionable are voluntarily chosen by the workers in those countries. That awful factory job is the best available option for that person. When that job disappears, then that poor peasant must take his second best option, a job that he judged to be worse than the awful factory job. While we might the working conditions intolerable, that's because we now have better options. If our goal is to help that worker, we surely don't want to destroy that job. That said, let's look at fair trade. 

To use the fair trade label, one must comply with the standards and certification requirements of one of a handful of fair trade organizations. Importantly, large producers and producers in more wealthy countries are better equipped than smaller producers to meet fair trade requirements. For example, fair trade coffee comes from relatively wealthy countries like Costa Rica, as opposed to from the poorest of the poor countries like Ethiopia. So by choosing fair trade coffee, you choose not to buy from the poorest producers. Is that fair? How about the workers who are able to produce fair trade coffee. Do their wages improve? Studies so far show no conclusive evidence that fair trade workers receive any higher wages. These studies find that retailers capture most of the extra money paid for fair trade coffee. So to answer the question. Fair trade lowers the demand for coffee produced by the poorest workers, and so it forces many of these workers into jobs that are worse than the ones that they'd have without fair trade, and for those workers who can thus produce fair trade coffee, the extra money doesn't get back to them via the supply chain. So what can help poor workers?

First, competition, for labor is key to increasing wages. So rather than shrinking employment options, which is what fair trade policies do, it would make sense for us, instead, to call for practices that maximize employment options for poor workers. Of course, no employer will pay any worker more than the value that that worker can produce. So, while competition is necessary, increasing worker productivity is the main path to high and rising wages. And how do we do that? Answering that question is part of an entire branch of economics, Development Economics, that explores why some countries are rich while others remain poor.

Check out our MRU course on that topic to learn more. Until then, please continue to send us suggestions on what other questions you'd like answered and vote on your favorites here. Here's the current leader-board. Go vote and tell us what topics you want covered next.