Globalization and the Wage-Working Conditions Relationship: A Case Study of Cambodian Garment Factories

The wage premiums for firm-level foreign exposure (exporting and foreign ownership) have been well documented in the literature, and their potential sources have been studied in depth. Compensating differentials and efficiency wages are two distinct explanations (with radically different implications for worker welfare) for wage gaps that persist between firms despite controls for firm and worker characteristics. We use a comprehensive dataset of working conditions and wage compliance in Cambodia’s exporting garment factories to explore (1) the impact of foreign ownership on wages and working conditions, (2) whether the relationship between wages and working conditions within these exporting factories more closely resembles efficiency wage or compensating differential theory and (3) whether the wage-working conditions relationship differs between domestically owned and foreign-owned firms.We find that foreign ownership increases compliance on both wages and working conditions, contradicting the contention that higher wages in foreign-owned firms compensate workers for worse working conditions. In addition, we find a robust positive relationship between wages and working conditions in the sample as a whole, suggesting that efficiency wages or a similar theory more accurately explains the behavior of these exporting firms than compensating differentials. This positive relationship is stronger in domestically owned firms than in foreign-owned firms, but the relationship remains positive, fairly large, and statistically significant even in foreign-owned firms. Due to the lack of evidence in support of compensating differential theory, we conclude that both foreign ownership and exogenously imposed improvements in working conditions improve net worker welfare.