Does Customer Auditing Help Chinese Workers?

Auditing by downstream firms has limited effects on Chinese firms’ adherence to labor standards and other measures of blue collar workers well-being. Auditing does not affect the suppliers’ blue-collar employees’ wages, probability of belonging to a union, or likelihood of working overtime. However, audited firms are more likely to provide rural migrant workers pensions, business medical insurance, and unemployment insurance. Introduction Does auditing by downstream firms affect how Chinese firms treat their workers? Using a large sample of firms from the National Bureau of Statistics of China’s Private Sector Survey of China, we investigate the relationship between customer auditing and Chinese blue-collar workers’ welfare. When we examine the relationships between auditing and welfare measures for all employees, we find little evidence that auditing affects the firms’ adherence of labor standards and raises workers’ overall welfare. However, if we focus on how firms treat their most disadvantaged workers, rural migrants, we find that rural migrants in audited firms receive statistically significant higher pensions and medical and unemployment insurance. Newspapers regularly report how Western firms, responding to public outcry in their own countries, pressure Chinese manufacturers to raise labor standard. For example, in 2012, Apple pressured Foxconn Technology Group to improve working conditions and raise pay at its Chinese factories, where it manufactures iPhones and iPads. Academics, labor activists, and non-government organizations have extensively documented labor rights violations in China over the last decade (e.g., Diamond 2003, Pringle and Frost 2003, Compa 2004, Cooke 2005). Since the late 1990s, multinational corporations have developed a variety of Corporate Codes of Conduct (CCC) as well as many auditing and monitoring mechanisms to check whether their suppliers, particularly in developing countries, comply with labor standards. Many of these groups urge companies that buy from Chinese suppliers to audit their treatment of workers. However, few studies have investigated the impacts of customer auditing, and none as far as we know have examined the effects on Chinese firms extensively. The existing studies generally find that auditing has very limited effect on workers’ welfare. For example, Locke, et al. (2007) analyzed its impacts on the improvement of working conditions using the data of Nike’s suppliers in 51 countries. Their analysis suggests that Nike’s efforts and investment on monitoring only produce little effects. Barrientos, et al. (2007) examined the impacts of corporate codes of labor practice on workers based on evidence from the UK Ethical Trading Initiative. They find that corporate codes may play a role in improving labor standards, but are currently doing little to challenging existing practices and social relations. Locke, et al. (2010) further compared two Mexican factories, and concluded that working conditions and labor standards are mainly the product of divergent patterns of work organization and human resource management and not of customer auditing. We extend the existing literature by examining the effect of auditing in China, by using more extensive measures of workers’ well-being, and by using more formal statistical analyses. We analyze data from the China Center for Economic Research at Peking University’s Private 1 For a more thorough discussion of CCC, see Jenkins (2001), Schrage (2004), and Mamic (2004). 2