Behind the barbed-wire fence surrounding the Federal Correctional Institution at Elkton, Ohio, inmates sit at a long table stripping down old computers, salvaging valuable bits of gold and platinum. In another room prisoners clad in protective suits hammer away at monitor screens and cathode tubes, the smashed glass destined for sale to reprocessors. Computer recycling is difficult, labor-intensive work—exactly the type now being exported to China and other bastions of cheap labor. But Elkton gets business from government agencies and schools precisely because it can compete with Third World wages. In fact, other state and federal prisons have also gone into business, making products for companies such as Home Depot and Lowe’s.

Why the sudden interest? The U.S. prison population has reached 2.1 million, up from just 300,000 20 years ago. Cash-strapped state governments are struggling both to cover the annual cost of incarceration, which has swelled over that time from $3 billion to $40 billion, and to find enough work to keep all those prisoners occupied.

Prominent conservatives have been encouraging prisons to put inmates to work for years. Led by Edwin Meese, the former U.S. Attorney General and head of the Heritage Foundation, and Morgan Reynolds, one of the first President Bush’s economic advisors, they have lobbied for real prison employment by the private sector—not just make-work projects like stamping license plates or building courthouse furniture. The benefits are difficult to ignore: Businesses get cheap, reliable workers; inmates receive valuable job training and earn more than they would in traditional prison jobs; and the government offsets the cost of incarceration and keeps jobs and tax dollars in the U.S.

Corporate America has started to pay attention. The number of inmates employed by the private sector is still relatively small: 10,000 prisoners working for about 250 companies. But that is up significantly from the mere handful just ten years ago. Meese estimates that companies could easily employ ten to 20 times as many inmate workers.

While some companies have embraced prison labor, many have been reluctant to do so. Recently, for example, Dell abruptly canceled its contract with Federal Prison Industries (Unicor), which operates Elkton and six other computer-recycling facilities. The decision came just days after the national media reported on an environmental group’s charge that the prison operation was a “poor example of worker health and safety.” (Larry Novicky, the head of Unicor’s recycling program, insists that all facilities meet federal standards.)

Dell’s experience is typical of the conflicting attitudes entrepreneurs–and society–have had toward prison labor since Jeremy Bentham first proposed, more than 200 years ago, that work could rehabilitate prisoners. Yes, there are benefits, but there is also what Knut Rostad, Meese’s colleague at the Enterprise Prison Institute, calls the “icky” factor—the specter of poor working conditions and chain-gang abuses. “In many ways,” says Rostad, “it is still easier for a company to go to Mexico or China than to a prison in its own backyard.”

Despite Dell’s retreat, a number of FORTUNE 500 companies have purchased prison-made goods. And for certain businesses—those that use manual labor but don’t make enough goods to support factories offshore—using inmate workers is particularly attractive. Take Anderson Hardwood Floors. Since it entered South Carolina’s Tyger River Correctional Institution in 1996, the company has been able to introduce labor-intensive, handcrafted wood floors that would be prohibitively expensive to make outside the prison fence. “When the doors close behind you the first time, it’s a bit unnerving,” says CEO Don Finkell. “But it doesn’t take too long to see that it’s just like working on the outside.”

Prison Labour Vignettes

Elkton, Ohio
Computers contain lead, mercury, and other hazardous materials. In the U.S. the only way to dispose of them is to send them to places like the Federal Correctional Institution in Elkton. Inmates in the “glass room” smash monitors and cathode tubes with hammers. Prison factories function much like those in the “free world,” except that the tools must be checked in at the end of the day.

Fresno, California
At the Central California Women’s Facility north of Fresno, inmates assemble circuitboards for Joint Venture Electronics. The company employs 55 inmates, including Terisa Brookshire, who has worked in the prison factory for five years. She took the job because it paid minimum wage—a lot more than the 33 cents an hour she could earn in the prison’s state-operated denture lab. She earns between $150 and $250 a month, which amounts to between $60 and $120 after deductions. “When you’re working,” says Brookshire, “you can almost forget you are in prison.”

Enoree, South Carolina
Opening a factory inside South Carolina’s Tyger River Correctional Institution enabled Anderson Hardwood Floors to reduce labor costs, improve productivity, and bolster its bottom line. “Turnover used to be a huge problem for us,” says chief executive Don Finkell. “In prison we hardly have any.” Inmates earn at least $5.15 an hour—about $2 after deductions for room and board, victim’s restitution, child support, and taxes—to produce labor-intensive, handcrafted floors now sold by Home Depot (EXPO), Lowe’s, and other retailers. “Prisoners get really involved in their work,” says Finkell. “This isn’t just a day job for them. It’s their whole life.”

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