Discussion Paper 1: Labour Law Compliance and Human Resource Management Innovation

19 Jan 2011

Analyzing labour law compliance data in the apparel industry from Better Factories Cambodia, we find that (1) there was a broad improvement in working conditions among factories both with and without a reputation sensitive buyer, (2) factories with a reputation sensitive buyer have higher average compliance, (3) after the elimination of public disclosure of factory level noncompliance the rate of improved compliance slowed for factories with a reputation sensitive buyer and compliance declined for factories lacking a reputation sensitive buyer but (4) compliance did not return to the baseline even in the absence of a reputation sensitive buyer or threat of public disclosure of noncompliance. These findings are consistent with the hypotheses that (1) third party enforcement complements code compliance efforts by reputation sensitive buyers, (2) factory-specific public disclosure of noncompliance helps control free-riding of noncompliant factories lacking a reputation sensitive buyer on the market-level reputational externalities generated by compliant factories and that (3) enforcement activities induce factories to experiment in human resource management innovations that are both more humane and more efficient.


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