Adam Ozimek -- blogger at Modeled Behavior and associate at Econsult Corporation
Yesterday I discussed why corporate social responsibility can be efficient. Today I wanted to discuss some likely objections to this and some problems that are likely to arise.
An important risk is when corporations pursue things which are seen as public goods or socially responsible but have serious tradeoffs that may result in negative welfare overall. For instance, many consumers seem to like knowing that their goods are made by workers with good jobs and decent pay. So firms may overpay workers or restrict working conditions relative to what negotiations between the firm and the workers would produce. When wages are raised without increases in productivity then the firm will generally end up employing fewer workers, and thus those workers who would otherwise have been hired end up worse off. Another problem is that firms may comply with consumer desires to not buy things made from low paid workers by simply using robots or by hiring workers with higher productivity and thus better job alternatives.
You might think that consumers can counteract the disemployment effect by also demanding that firms don't employ less workers than they otherwise would, but this is almost impossible to monitor. Absent a way to credibly demonstrate this, firms pressured into raising wages are more likely to profit maximize and thus employ fewer workers.