PBt-'tG:>l 1-

COi~~~ ~fi~ i551ON'

APPROVED

COMMENTS OF THE BUREA US OF ECONOMICS,

COMPETITION, AND CONSUMER PROTECTION OF

THE FEDERAL TRADE COM1vfISSION

Washington, D.C. 20580

December 4, 1986

Introduction

The staff of the Federal Trade Commission ("FTC) is pleased to offer

comments on the Notice of Proposed Rulemaking ("NPRM") concerning

homeworkers published by the Department of Labor ("DOL").l DOL

requested comments on the possibility of replacing the outright ban on

homework in six industries with a certificate system designed to insure

compliance with the minimum wage law.

In brief, we conclude that relaxing the homework ban in the six

currently restricted industries will likely reduce total production costs in

those industries. As a consequence, prices to consumers will likely be

reduced. Using the sparse available data, we roughly estimate the gains to

consumers and producers from removing the ban. Based on the productivity

experience of one apparel firm and applying that experience to four apparelrelated restricted industries, the estimated gains are on the order of $28-

S 150 million per year. Against such potential benefits must be weighed the

potential costs of relaxing the ban, principally the possible evasion of the

Employmel" t of Homeworkers in Certain Industries, 51 FR 30036

(A ugust 21, 1986). These comments represen t the views of the Burea us of

Economics, Competition and Consumer Protection and do not necess:Hily

reflect the views of the Federal Trade Commission or any individual

Commissioner. The Commission has, hcwever, authorized the filing of these

comments. Inquiries regarding these comments should be directed to John

Woodbury, Bureau of Economics.
minimum wage la w. 2 Because employers who wish to use homeworkers

legally would have to comply with DOL's proposed certification standards,

DOL will be in a position to monitor these employers to insure that they do

not violate the minimum wage law. Indeed, as employers bring themselves

within the monitoring system and the new option of legal homework

employment, minimum wage violations may actually decline.

In section I of these comments, we consider the benefits from relaxing

the ban, while in section II we address the possible costs of lifting it. In

section III we summarize our conclusions.

1. BENEFITS FROM RELAXING THE BAN

Originally promulgated by DOL in the 1940's, the current homework ban

applies to six industries employing 550,000 production workers and producing

goods valued at S29 billion in 1982. 3 While employers in these industries

have been prohibited from hiring homeworkers, the total number oi

homeworkers in other industries has grown dramatically. In 1959, DOL

estimated that a total of 22,580 homeworkers were employed by C"S.

Z For the purpose of this commen t, we do not address whether the

minimum wage law advances the interests of consumers or efficient resource

alloca tion.

3 The six. industries are women's apparel, gloves and mittens,

embroideries, handkerchiefs, jewelry, and buckle and button manufacturing.

Approximately 91.2% of employees and 85.6% of the value of shipments are

derived from the four apparel-related industries. U.S. Department of

Commerce, 1982 Cen~us of Manufacturers, General Summar v, Table 3, pp. 1·6,

1-8, 1-10, 1-18. The ban was issued following passage of the Fair Labor

Standards Act ("FLSA") of 1938, which first promulgated (among other

provisions) a national minimum wage. The original homework ban also

encompassed a seventh industry, knitted outerwear. In December 1984, DOL

replaced the ban in knitted outerwear with a detailed certification system.

2
manufacturers.· By 1980, that number had grown to 731,660. 5 By 1985, the

number of homeworkers had further grown to three million, 57,000 of whom

were in apparel manufacturing. 6 With recent advances in computer

technology permitting an increasing use of remote work stations, the number

of homeworkers in all industries is forecast to grow to ten million by 19907

and twenty million by the year 2000. 8

This increasing prevalence of homework suggests that employers

consider homework an effective means of reducing production costs. Thus.

the primary benefit from relaxing the homework ban in the six restricted

industries is likely to be the ability of firms in these industries to employ

less costly techniques of production. For example, while the competitive

wage for homeworkers may be above the minimum wage, it may be less than

that for factory workers. If so, then to comply with the existing ban, firms

in these industries have likely utilized more capital and plant space and more

expensive labor inputs to produce any given level of output. Alternatively.

because of differences in the working envircmment or because of the form in

which wages are paid (for example, a piece rate rather than an hourly rate).

horneworkers rna y be more productive than factory workers. For reasons

such as these, the prices consumers must pay for the output of these firms

:

• DOL, Emolovmen t of Workers Under FLSA (1959), Table 4, p. 31,

and DOL, Emolovment and Earnings (April 1960), Table SB-2.

5 Bureau of Census, Work at Horne Tabulation: Reference Week in

J980 (1985), Table 2, p. 19.

6 Bureau of Labor Statistics (BLS), "Work Patterns and Prefe~ences of

American Workers: News (A ugust J 986), p. I and Table 2, and from BLS

personnel.

7

8

"Telecommuting," Cleveland Plain Dea!er (July 14, 1985), pp. 61, 66.

"Homework," Fortune (August 25, 1984), pp. 10-11.

3
are probably higher than they would be absent the ban. By permitting a

more efficient use of resources, ::! relaxation of the homeworker ban will

tend to reduce both costs and prices in the restricted industries.9

Not only will consumers in general benefit from a relaxation of the

ban, but current and prospective home workers will benefit as well.

Relaxation of the ban will increase the employment options available to

individuals who prefer to work at home. The ban on homework in the SlX

industries may mean that some of these individuals now work at home in

other unrestricted industries, work in less preferred (even if more highly

compensated) factory positions, or do not work at all. Further, because the

utilization of homeworkers is reduced by the ban, the compensation of

homeworkers is now less than it otherwise would be.

In the appendix, we have estimated both the gains to consumers from

the lower apparel product prices that would prevail in the absence of the

ban and the gains to homeworkers (and other input suppliers) from higher

compensation levels. Our calculations are based on the productivity

experience of a single apparel firm in a restricted industry that employed

9 A large number of economic studies have concluded that, in gene;:l1.

restrictions on production techniques increase the cost of production and

increase prices paid by consumed. For example, see J. Pertof, "The Imo3ct

of Licensing Laws on Wage Changes in the Construction Industry," Journal of

Law and Economics (October 1980), pp. 409-28, D. Caves, L. Christensen, and

J. Swanson, "Economic Performance in Regulated and Unregulated

Environments: A Comparison of U.S. and Canadian Railroads," OU:lrterlv

Journal of Economics (November 1981), pp. 559-81, and A. DeVany, W.

Gramm, T. Saving, and C. Smithson, "The Impact of Input Regulgtion: The

Case of the U.S. Dental Industry," Journal of Law and Economics (October

1982), pp. 367-81.

The ban may also have skewed the outcome of normal competitive

processes in other ways. The :"-iPR~ notes a number of anomalies created by

the current ban. For example, homeworkers on produce bathrobes and

metal buttons but not housecoats or wooden buttons, so that production and

consumption are likely to have been diverted from the latter to the ::>rmer.

4
homeworkers until DOL required their termination. These calculations

assume that the productivity experience of this single firm would be typical

of that in four restricted apparel related industries. We estimate that

consumers and production inputs would experience a gain of between $28

million and $150 million per year if the ban were removed. IO

Finally, relaxation of the ban may improve the international

competitiveness of the restricted industries. For example, import penetration

in women's apparel has grown from 1.8% in 1967 to 17.0% in 1983. 11 These

increasing imports, particularly in the apparel-related industries, have led to

the imposition of quantitative restrictions on imports that deny consumers

the opportunity to choose imported instead of domestic apparel. 12 By

ena bling the firms in the restricted industries to employ the most costeffective production techniques thr.ough a relaxation of the ban, the rate of

10 We provide a range of estimated

and a number of simplifying assumptions.

be quite imprecise. A complete discussion

the appendix. Because of data limitations

of the six restricted industries.

gains because of data difficulties

Thus, our estimates are likely to

of these issues can be found in

the estimated gains are for four

11 These figures cover only SIC 233, which represented approximately

75% of value of shipments in women's apparel in 1982 (1982 Census of

Manufactures). Time series data on import penetration are not available for

the rest of the restricted industries or for the remainder of the women's

apparel industry. The data for SIC 233 are from U.S. Department of

Commerce, J984 U.S. Industrial Outlook (1984), pp. 41·1 to 41·11, and J978

U.S. Industrial Outlook (1978), pp. 245·50.

12 The U.S. imposes textile import quotas on 22 countries under the

umbrella of the Multifiber Arrangement (MFA). M. Morkre, Import Ouotas

on Textiles: The Welfare Effects of U.S. restrictions on Hong Kong (FTC,

1984), p. 1. Tariffs on textiles and clothing in industrial countries are

between two and three times higher than tariffs on manufactured goods as a

whole. The textile and clothing industries are the only ones given formal

exemption from the normal world trading rules administered by GATT. Th~

Economist (July ~8, 1984), p. 57.

5
increase in imports and industry demand for trade protection may be

reduced.

In sum, replacing the ban in the six restricted industries with a

certification system may reduce prices to consumers, increase the eco,,::;rr.ic

well-being of current and prospective home workers, and improve the

international competitiveness of the restricted industries.

II. POTE~TIAL COSTS OF LIFTI01G THE BAN

The primary objection raised by those who oppose relaxation of the b3.n

on homework is the possible inability of DOL to detect violations of the

minimum wage provisions of FLSA. 13 However, the NPRM describes an

intensive monitoring and enforcement program adopted by DOL when it

dropped the ban in knitted outerwear and replaced it with a certification

program. By all appearances, this program has achieved its goals. Between

December of 1984 and April of 1986, DOL reports that it ;:ompleted

investigations of 35 of 50 certified employers in this industry. Of these 35,

14% (1.&., 5 em ployers) were found to ha ve u nderpa id some of the ir

home workers, and by an average of SIOO per underpaid worker during the

period of investigation. This contrasts sh3rply with the results of DOL

complaint-based investigations of: employers in all other industries, 66% of

which have disclosed the existence of minimum wage violations. If DOL

applies the same enforcement program to the currently restricted industries,

13 International Ladies' Garment Workers' t...:'nion, "Fact Sheet on

Homework," before the Subcommittee on Labor Standards of the Committee

on Education and Labor of C.S. House of Representatives (Sept. 16, 1986).

pp. 2-13; Federationist. "Homework: A Return to the Industrial Sweatshops

and No Protection" (August 2, 1986), p. 3.

6
the certification program should have comparable results in deterring FLSA

viola tions by certified employers. 14

Because certified employers of homeworkers will have to identify

themselves to DOL, one significant administrative cost--that of locating

employers of homeworkers--will be reduced. Therefore, the certification

15

program may result in a lower administrative cost to maintain the same level

of FLSA compliance in the six restricted industries as in other industries. IS

Another argument that opponents of the proposed relaxation have

advanced is that while homeworkers may be paid at or above the minimum

wage, the rate of compensation for homeworkers will nonetheless be lower

14 It is our understanding that employers of homeworkers in

industries other than the original seven in which homework was prohibited

must comply with DOL's detailed record-keeping requirements. DOL in turn

conducts investigations of a sample of such firms to insure compliance with

the provisions of the FLSA. However, none of these unrestricted homework

employers must first be certified by DOL in order to employ homeworkers.

Given the dramatic economy-wide growth in homework noted above, we are

aware of no policy reason why homework employers in these seven industries

should be certified to hire homeworkers. We are also unaware of any policy

reason why DOL would adopt a higher FLSA compliance level for homework

employment in the six restricted industries and knitted outerwear than in all

other industries. Because of recent court decisions, we recognize that DOL

may be required to institute a certification system if the ban is relaxed.

NPRM, p. 30036. We suggest thai DOL carefully weigh its legal options in

this regard. If DOL does adopt a more stringent compliance level, DOL may

wish to consider alternative schemes for enforcing FLSA that could result

through deterrence in lower administrative costs.

Another reason why the proposed relaxation may result in fewer

violations is that under a certification program a homeworker may be less

reluctant to report FLSA violations to DOL. Under the proposed relaxation.

the provisions of the FLSA would prevent such an employee from being fired

(provided that the employer corrects the FLSA violations and thus retains

his or her homework certificate). Under the current ban, a homeworker

complaint to DOL compels DOL to order the employer to terminate homework

which puts its homework employees out of work.

7
than that of their factory counterparts. 16 Even if that is true, it is not

necessarily undesirable. Differences In competitive wages be:ween

home workers and factory workers can be explained by a whole array of

factors. On the demand side, for example, there may be a tendency for the

homeworker wage to be higher than that for factory workers if the use of

homeworkers results in reduced need for plant space and, therefore, savings

to the employer. But there may also be additional costs to the employer

utilizing homeworkers that are not incurred with factory workers. For

ex.ample, because all workers in a factory are physically prox.ima re,

assignments can be made and changed more easily· than for homeworkers.

Monitoring of work quality of factory workers can likewise occur as the

work is in progress rather than after the work is completed. These other

factors would tend legitimately to reduce the compensation of homeworkers.

On the supply side, there maybe differences in skill levels between

homeworkers and factory workers that affect the competitive wage of

homeworkers. In addition, homeworkers will not require a higher wage to

compensate them for travel time to and from work. Homework also provides

direct benefits to employees, including satisfying the desire to rem2.in at

home with children or other family members, the ability to set one's own

work schedule, and the ability to' pursue other interests while working fullor part-time at home.

In order to compare the level of competitive compensation of

hcmeworkers to that -of factory workers, all of these factors and others must

be considered fully. Since competitive labor markets are unlikely to sustain

16 Thirty-Ninth Report by the Committee on Government Operations.

Homebased Clerical Workers: Are Thev Victims of E~Dloitation'} (July 16.

1986).

8
unwarranted wage discriminations, there is probably little or no difference

between the ultimate compensation paid homeworkers and that paid factory

worke:-s after accounting for these factors. Further, if compensation for

homework in the now-restricted industries is less than that for homework

elsewhere, individuals are unlikely to accept a less desirable homeworker

position in the currently restricted industries.

Two other possible objections to repeal of the current ban should also

be discussed. First, some have argued that homework will exacerbate the

discomfort of the already crowded living conditions with which some

homeworkers must contend. l1 Because of the equipment and supplies

required by the homeworker, homework could aggravate living conditions that

are already crowded. This argument is not persuasive. The selection of

homework over factory work by an individual in these circumstances would

indicate that the gains from homework outweigh the costs, including that of

additional crowding. Further, by expanding earning opportunities for such

individuals, a relaxation of the homework ban should enable them to

ameliorate their living conditions.

A second possible objection to repeal is that employment of factory

workers may be reduced in the now restricted industries. 1s However, there

is some evidence to suggest that when an employer has more options in

choosing and paying the workers hired, total employment possibly including

17 Federationist (August 2, 1986), p. 2.

18 International Ladies' Garment Workers' t.:nion, "Questions and

Answers on Industrial Homework" (198:n, p. .,

9
that of factory workers actually increases. 19 Further, even a small

reduction in the costs of the restricted industries may dramatically improve

their international competitiveness. Consequently, consumers will tend to

increase their purchases of domestic goods and reduce their purchases of

foreign goods, leading to an even larger increase in domestic output and

employment.

In sum, there appears to be no reason to believe that homeworkers will

be paid a lower-than-competitive wage by employers or that the relaxation

of the homeworking ban would aggravate the crowded living conditions

experienced by some individuals. Further, there is some evidence to suggest

that total employment in the affected industries could increase following

relaxation of the ban.

III. CONCLUSION

The existing homeworker ban In six industries has likely resulted In

inefficient production techniques, higher costs, and higher prices to

consumers than would exist otherwise. Using the limited available data, we

provide DOL with an estimate of the possible magnitude of the benefits that

could accrue if the homeworker ban were relaxed. Our calculations, while

valid only within the confines of the assumptions used, indicate that the

gains could be on the order of $28-$150 million annually. Included in these

gains, but worthy of separate mention, is the social benefit of giving

19 A recent study shows that total employment may expand if a

wage-differential is permitted for different worker categories. C. Brown.

"Estimating the Effects of A Youth Differential on Teenagers and Adults,"

Minimum Wage Stud v Commission, Vol. V (June 1981), p. 389. As a result of

a cost decline, industry output will expand, generating a higher level of tOD.!

employment. If the output expansion is sufficiently large. total employment

can rise beyond the level experienced prior to the cost decrease.

10
workers a wide range of employment options from which to choose. The

alleged potential costs of removing the ban include increased violation of the

minimum wage laws and therefore reduced income for workers. Such costs

do not seem likely to occur to any substantial degree in competitive labor

markets given the certification program aDd the current level of DOL

enforcement. Assuming that the administrative costs of the certification

program do not outweigh the estimated gains from relaxing the ban,20 we

recommend that the homeworker ban be removed.

20 But see note 14 above.

II
APPENDIX

Estimating the price and Output Effects

of Lifting the Homework Ban

by

Susan Foster

Bureau of Economics

In this appendix, we describe the method used to estimate

the price and output effects of lifting the homework ban in four

1 apparel industries, predominantly women's apparel. We first

describe the model, and the supply and demand conditions assumed

in these industries, and then we detail the sources for the

parameters used. Next, we derive the new prices and quantities

resulting from use of more efficient production techniques

following removal of the ban. Finally, we describe the method

used to calculate the social benefits from lifting the ban.

Al. Model

We assume that the four apparel industries can be integratec

into a single industry with one homogeneous output that we will

ca 11 I g1 ov e sI mea sur edin do zen s 0 f pa irs. ~e assume perfect

competition, and we further assume that linear relationships

2 exist between price and quantity for both demand and supply.

1 These industries are women's apparel, gloves and mittens,

embroideries, and handkerchiefs. We excluded jewelry and

button/buckle manufacturing because the available data upon which

we base our calculations appears more relevant for apparelrelated industries.

2 This convenient assu~ption is consistent with other analvsis

of the apparel industry. See, for example M. ~orkre, lmoort

Quotas on Textiles: The Welfare Effects of United States

Restrictions on Hone Kone (FTC, August 1984), p. 14 (hereafter,

'Morkre').
Demand is the same before and after lifting of the ban:

(1) pd = a + b Qd

where: Q d = the quantity of glove units demanded by D.S.

cons urner s

p d = the price of gloves which U.s. consumers are

willing to pay at any given quantity

a = the highest price consumers will pay to move from

zero to positive consumption

b = the reciprocal of the number of glove ur.its a

consumer w ill give up in response to a one

unit increase in price.]

In contrast to the stable demand, the supply relationship is

assumed to shift down after lifting of the ban so that supply

price is less by the same dollar amount at every previously

. 4 supplied quantlty. Supply before the ban is lifted is:

(2a) P s = c + d Q s

while supply after lifting the ban is:

( 2b ) P s' = C I + d Q s'

where: Q s = the quantity of gloves t~at ~anufacturers

will supply at ar.y siven price, with ban

p s = the supply price which will call forth

a given quantity of gloves, with ban

:

3 Because of the pervasiveness of import quotas, we assume t::at

the quantity of imports in the four restricted industries remains

constant, Le., even at a lower price, the quantity of irr,ports

supplied would not be reduced. In effect, we assume a pen':-up

demand for imports. Thus our representation of consumer demand

should be considered as domestic demand net of this cons':ant

quantity of imports. Because only incomplete data on imports in

the restricted industries is available, we have not calculated

the consumer gains derived from purchasing the fixed quantity of

imports at a lower price following the ban's relaxation.

Therefore, the consumer gains presented in the text will

understate the true extent of gains.

4 See footnote 12 for details of this shift.

2
c = the price necessary to begin glove production,

with ban

d = the reciprocal of the number of additional

glove units supplied in response to a one unit

increase in supply price

p s' = the supply price, without ban

Q Sf = the qua nti ty of gl ove uni ts suppl ied f or any

given supply price, without ban

c' = the equivalent of c but without ban.

Finally, market equilibrium before and after the ban is

relaxed requires that at the market price, quantity demanded

equals quantity supplied.

A2. Parameters in Model

The starting values for our model of the restricted portion

of the apparel industry were those for the calendar year 1982.

To arrive at quan~ity we multiply an apparel output/labor, ratio

without homework5 by the total number of production workers.6

in the four restricted apparel industries. To arrive at price,

5 The output/labor ratio at one glove factory which employed 85

homeworkers and 165 factory workers was 60.0 dozen pairs a week;

this ratio fell to 48.5 dozen "pairs per week when the homeworkers

were laid off. These data were provided by plant personnel at

Tom Thumb Glove, Wilkesboro, N.C. Tom Thumb is a firm which

illegally employed homeworkers and was compelled by DOL to terminate its employment of homeworkers. Tom Thumb's homeworkers

averaged $5 to $6 per hour. This information was provided by The

Center on National Labor policy.

6 U.S. Department of Commerce, Census of Manufactures.

3
f h . 7

we divide the value 0 s lpments

by the qua nti ty just cal c ul a te d.

price figures are:

for these restricted industries

These initial quantity and

8 Q = 1,262.8 million dozen pairs of gloves

P = $19.79 per dozen pairs of gloves.

In addition to initial price and quantity, we require

parameters for the demand and supply models. To calculate the

slope of the demand equation (Ib' in equation (1) ), we utilize

an estimate of -.282 for the price elasticity of demand for the

entire apparel industry at the original price and quantity of the

four restricted industries. 9 with this estimate and our initial

price and quantity estimates we calculate a in equation (1) as

7 Value of shipments in 1982 was estimated to be $24,992.0

million. U.S. Department of Commerce, 1982 Census of

Manufactures. This estimate was made in the following manner.

The Census of Manufactures provided complete data for one of the

four industries, women's apparel (SIC 233,234, and 236). value

of shipments in womenls apparel totaled $24,278.6 million. SIC

2381, 3151, and 3199 encompass gloves but SIC 3199 also encompasses

other leather goods. Both SIC 2395 and 2397 include embroideries

as well as pleating, buttonhole making, crochet ware and tucki~g.

Handkerchiefs are part of SIC 2389 as are armbands, footlets,

garters and suspenders. For these four mixed SIC groups, we

attributed only 18 percent of "the combined value of shipments to

the four restricted industries. Because employment data for

gloves, embroideries and handkerchiefs were also included in the

same mixed SIC groups, we only attributed 18 percent of the

employment in those SIC groups to the four restricted industries.

8 Q = 500,700 workers x 52 weeks x the output/labor ratio

(48.5).

9 H. Houthakker, "New Evidence on Demand Slasticities,"

Econ0 met rica (1 96 5) , p. 280 .

4
589.97 and b as -5.56 X 10 _8. 10 Because there are no available

estimates of the supply elasticity, we utilize two different

a ssum pti ons. In one case we assume that the supply elasticity is

infinite, Le., that the supply curve is horizontal at the market

price. In the second scenario, we assume that the supply

elasticity is 20, imparting a modest upward slope to the supply

curve. With the horizontal supply curve, c in equation (2a)

equals S19.79 and d equals zero. When the supply curve is upward

sloping, c equals S18.80 and d equals 7.84 X 10 -10. 11

The last parameter necessary to proceed with the calculations is c t , the intercept of the post-ban supply curve in equation (2b). The lower intercept represents a downward shift in

t~e supply curve. The downward shift results from the reduction

in production costs following relaxation of the homework ban. We

calculate this downward shift by applying the percentage increase

in productivity (Le., the percentage change in the output/labor

ratio) resulting from t~e use of homeworkers to the ::>ercent of

total variable costs accounted for by production workers in t~e

:

10 With equation (1), the demand curve, and the initial

values of price and quantity, we can solve for a, the initial

intercept value for the demand equation:

a = P D - b Q D

= 19.79 + (.0000000556) (1,262,765,400) = S89.97

11 The intercept for the upward sloping supply curve is found in

the following manner:

c = P - d Q

= S19.79 - (.000000000784) (1,262,765,400) = S18.80

5
· d" . 12 four restrlcte lnaustr:es. The new intercept (c ' ) is S19.55

for the horizontal supply curve, while that for the upward

sloping supply curve is S18.58. Essentially, removal of the

homeworker ban reduces costs by 1.2 pe=-cent.

12 Based on the experience of Tom Thumb, the effect of the ban's

relaxation is to increase the output/labor ratio from 48.5 to

60.0, a 23.7 percent increase in productivity. This higher level

of productivity is associated (in Tom Thumb) with a homeworker to

total worker ratio of .34 (85 homeworkers out of 250 total

workers). To calculate the likely percentage of homeworkers in

the four restricted industries following the ban's relaxation, we

first assume that all 57,000 homeworkers in the apparel industry

(DOL, Bureau of Labor Statistics (BLS),~, August 7,1986, and

from BLS personnel) are employed by the unrestricted industries.

Thus, homeworkers compose 12.4 percent of production employment

in states that do not ban homework in these industries (production employ~ent in restricted and unrestricted apparel industries

from U.S. Department of Commerce, lia2 Census of ~anufactures).

We then assume that the percentage of homeworkers in the restricted industries will also be 12.4 percent following the ban's

relaxation. Assuming no change in total employment in the restricted industries, there will be 49,900 honeworkers (based upon

402,400 production workers in restricted industries who are not

covered by state bans on homeworkers). Rather than estimate a

continuum of production functions from zero homeworkers/all factory workers to all homeworkers/zero factory workers -- both

the ends of t~;e spectrum are not uncommon -- we have assumec a

dichotomous production pattern. That is, we have assumed that

all horneworkers combine with all workers at the To~ Thu:,:",b

ratio, .34 (Le., 49,900 homeworkers out of a total of

146,800 homeworker/factory workers) and the re!7\aining production

workers produce in factories "Yithout any homeworkers. Thus, cut

of 500,700 production workers, 146,800 (29.3 percent) produce at

the output/labor ratio of 60.0, and the other 353,900 (70.7

percent) produce at the output/labor ratio of 48.5.

An increase in worker productivity indicates that the costs

of producing any given level of output falls: the sa:7:e amount of

labor can produce a greater output or equivalently any given

level 0: output can be proc.uced with fewer labor inputs. Thus, a

23.7 percent increase in productivit::' results in Co 19.2 percent

decline in labor costs. To see why this is so, consider tr.e

following example. A.ssume that the current daily output level

(Footnote continues)

6
Thus, we now have all the information needed to calculate

the new prices and quantities following the ban's relaxation. By

way of summary, the parameters for the demand curve are:

a = $89.97

b '- -5.56 X 10 -8

For the horizontal supply cu r...re :

C = S19.79

c' = S19.55

d = o.0

For the upw ar d-sl opi ng supply curve:

c = S18 .80

c' = S18.58

d = 7.84 X 10 -10

(Footnote continued)

(without homeworkers) is 100 units, the daily wage of workers is

S50 and that there are a total of 100 workers. Then the current

labor cost per unit of output is S50. After the homework ban is

r e1 a xed, dailyout put ri s est 0 1 23 .7 un its and the a'.' eragel abo r

cost per unit of output falls to 540.42, a decline of 19.2

per ce nt.

In the four restricted industries, the percentage of total

variable (labor plus materials) cost accounted for by productic:i

workers is 22.2 percent (from: l..i.a2. Census of Manufactures).

Therefore the reduction in total variable costs by firms

employing homeworkers in the restricted industries is 19.2

percent times 22.2 percent, or a 4.26 percent cost reduction.

Because the cost reduction is only attributable to 29.3 percent

of employment in the four restricted industries, the average cost

reduction experienced by the four industries in total will be

29.3 percent times 4.26 percent, or 1.2 percent..

For the horizontal supply curve scenario, the vertical

downward shift in the supply curve is .012 tir:les 519.79, the

original supply price. Thus, in this case, the price follow':'ng

the ban will be S19.55. In the case of the upward sloping supply

curve, we calcclated the absolute cost decline 15.22) at the

original intercept. Had we used the original price, the absoll.::e

cost reduction ""ould have been somewhat larger and the gains frc:71

the ban's relaxation would ha',/e been somewhat greater.

7
AJ. Quantities and Prices Resulting from Lifting the Ban

The original and post-ban market positions are depicted in

figure 1 (horizontal supply curve case) and in figure 2

(upward sloping supply curve case). In both figures, the original

quantity supplied and demanded is Qs while the market clearingprice is Pe. Following the ban's relaxation, the supply curves

in both figures shift down as a result of the induced reduction

in cost. The new equilibrium quantity is QC and the new market

clearing-price is PC' Equating price in equation (1) (demand)

with price in equation (2b) (new supply), we can solve for the

new quantity resulting from lifting the ban, Q C:

a + b Q C = c ' + d QCi

QC = (a - c')/ (d - b).

In the case of horizontal supply, the ne w ir.te r ce pt (c' ) is the

new price (PC) and d (slope) = O. New output (QC) is:

Q C = (a - P C)/(-b) = 70.42/ .0000000556

= 1,267.0 million.

In the of upw-ard- sloping:

case supply, new output is:

Q C = (a - c ') / (d - b) = 71.39/ .0000000564

= 1,266.8 million.

In the case of horizontal supply, the new Darket price (PC) is t~e

same as the new intercept (c '), or S19.55. In the case of the

upwar d slopi ng upply cur v e , mar ke t p riceremair:s t 0 be

determined using tr.e new output (QC):

8
Pc = a + b Q C = 589.97 - (.0000000556) (1,266.8 mil)

= $19.57

A4. Estimated Gains from Relaxing the Ban

Here we detail a method of measuring the gains to the economy

from relaxing the ban on homework. Lifting the ban would induce

an increase in the output and lower the price of goods in the

restricted apparel industries. Gains from lifting the ban would

consist of the changes in consumer and producer surplus that

result from the improved use of resources. To compute these

changes we first look at what consumers would gain. At the

initial point B in figures 1 and 2 the consumer surplus is that

area above price, but below the demand curve. This is

represe n ted by the area 0 f the t ria n g1 e a- PB- B. At t e r the ba n i s

lifted consumers and producers will b€ at point c. The consumer

surplus is represented by the area of triangle a-pc-C.

Changes in consumer surplus as a result of lifting the ban

are the differences between the second and first triangles.

For the horizontal supply curve the gain is 5300,411,438.

For the upward sloping supply, curve the gain is 5281,392,757.

We now compute the changes in producer surplus resulting

from lifting the ban, represented in figures 1 and 2 as a move fror.:

point B to point C. In the case of a horizontal supply curve

this area is zero. For the upward sloping supply curve the

methodology is identical to that in the consumer surplus case.

Producer surplus before the ban is lifted is represented !:y

the triangle PS-C-B. This area can be calculated as:

9
Area (PB-c-B) = 1/2 (PB - c)QB

= $624,800,000.

Producer surplus after the ban is lifted, where point C

represents the new price and quantity, is represented by:

Area(Pc-c'-C) = 1/2 (PC -c')QC

= $628,767,638

The gain in producer surrlus is thus $3,967,638.

Finally the total gain to society as a result of lifting the

ban is simply the sum of the gains in consumer and producer

surplus.

For the case of the horizontal supply curve, the change in

producers surplus is zero. Therefore the total gain is

$300,411,438.

For the upward sloping supply curve case, the total gain is

$285,360,395.

We note that the assumptions used to generate the percentage

cost reduction may result in the producer and consumer gains

being overesti~ated. Approximately 97 percent of the value of

shipments in these four industries (an estimated $25 billion) :.s ,

accounted for by women's apparel. It may be that the

productivity gains using homeworkers in w6men's apparel would not

be as substantial as those experienced by Tom Thumb in glove

production. Further, our baseline calculations assume that

absent the ban, the percentage of homeworkers in the four

industries would be identical to that in the unrestricted apparel

i:;dustries (Le., 12 percent of all production employees in

states that do not ban homework). But the actual percentage

1'1
could be lower if cost-efficient production techniques in women's

apparel in particular do not include an extensive use of

homeworkers. For example, in knitted outerwear, certified

homework employees accounted for only 2.7 percent of all knitted

outerwear employees (data provided by OOL officials). Finally,

we do not know the extent to which illegal homework occurs in the

four restriced industries even while the ban is in effect.

For these reasons, the estimate of the gains are deflated by

90 percent and by 50 percent to reflect our uncertainty. For

example, the 10 percent estimates would be roughly equivalent to

assuming that only 1.2 percent of the employees in the four

restricted industries would be horneworkers absent the ban. We

present these deflated estimates in Table 1, the basis for the

gains reported in the text.

l:!.
Table 1

Effects of t.~e Ban's Relaxation*

Horizontal SUpply CUrve

Change in' Consumer SUrplus

~pward Sloping SUpplv curle

10 perCEnt of basel ire

50 perCEnt of baseli;,e

Change in Producer SUrplus

10 perCEnt of basel ire

50 perCEnt of taseline

Total G1.ange in surn1us

10 p:rCEnt of basel ine

50 perCEnt of baseline

S 30.0

$150.2

$0

SO

S30.0

S150.2

S28.1

S140.7

S.4

S2 .0

S28.5

$142.7

* The baseline calculations assume (1) that Tom Thumb's

productivity experience would be typical for the four restricted

industries in the absence of the homeworker ban and (2) that

homeworkers in the four restricted industries after the ban's

relaxation will account for the same percentage of total

production employment as in the unrestricted apparel industries.

:

12
PRICE

QUANTITY

a

P = C I--------~-------- SUP PLY B

Pc =cI ...-------~------"r_--- SU PPLY I

0=$89.97

c = Ps = $19.79

I

c = P = 19.55 c

:

Q s = 1,262.8 million dz. pairs gloves

Q C = 1,267.0 million dz. pairs gloves

FIGURE 1

HORIZONTAL SUPPLY

13
.!

PRICE

a

P

B

c

I

C

a = $89.97

c = 18.80

I

c =18.58

QUANTITY

.. PB = $ 19.79

19.57

1.262.8 million dz. pairs gloves

1.266.8 million dz. pairs gloves

FIGURE 2

UPWARD SLOPING SUPPLY

14