Labor Standards and Economic Integration in the European Union: An Empirical Analysis

This study is motivated by frequent calls to harmonize labor standards across countries, which result from the fear that economic integration (and the accompanying liberalization of trade flows) will lead to an erosion of working conditions, as countries deliberately try to reducelabor standards in order to maintain competitiveness. We examine the linkages between labor standards and economic integration in the European Union (EU) and, in particular, investigate the following questions. First, whether the conventional wisdom that labor standards are important determinants of trade performance holds, and second whether there has been a “race to the bottom” of standards across countries with deeper integration. We follow a neoclassical factor-proportions framework to conduct our empirical investigation, and unlikeprevious studies, which rely mostly on cross-sectional data, we use a fully-fledged panel data set to explore the relationship between labor standards and export performance. Our estimates based on data for the period 1980-2001 for EU-15 countries provides mixed evidence regarding the conventional wisdom, and we find that trade performance is largelybased on factor endowments. We also find mixed evidence for “ó-convergence” in laborstandards.economic integration, labor standards, comparative advantage, ó-convergence

Trade and Labour Standards - Theory, New Empirical Evidence, and Policy Implications

Recent trade negotiations, both at the regional and multilateral level, have seen a resurgence of the issue of trade and labour standards. As the world economy becomes increasingly globalised and the volume of world trade flows keeps increasing between the North and the South, it is very likely that the interaction of labour standards and international trade will continue to remain high on the agenda of future trade talks. Labour interests in high-standards countries argue that low labour standards are an unfair source of comparative advantage, and that increasing imports from low-standards countries will have an adverse impact on wages and working conditions in high-standards countries, thus leading to a race to the bottom of standards. For low-standards countries, there is the fear that this is just a form of disguised protectionism and that the imposition of high labour standards upon them is equally unfair since it will erode their competitiveness, the latter being largely based on labour costs. Our objective in the present paper is to cast some light on the above debate from both a theoretical and empirical perspective. In particular, we first discuss some possible theoretical links between labour standards and comparative advantage through their effects on the terms of trade. We then investigate empirically the effects of labour standards on export performance and foreign direct investment flows. Overall, our empirical results suggest that caution should be exercised before drawing broad conclusions on the magnitude and direction of these effects. We conclude by presenting policy implications of our analysis.

International Trade, Labour Turnover, and the Wage Premium: Testing the Bhagwati-Dehejia Hypothesis for Canada

In this paper we examine the impact of international trade on the absolute and relative wages of educated and less-educated workers in Canada over 1993-96. We show that after correcting for the relative supply effect of educated to less educated workers the wage differential would have been on an upward trend. Moreover, after controlling for other relevant factors influencing real wages, trade had a statistically significantly positive impact on the wages of both educated and less educated workers. However, the impact on the educated workers was four times stronger, roughly the same as the impact of technology on relative wages. We show that the observed relationship between trade and the relative wage of educated to less-educated workers does not fit the Stolper-Samuelson theoretical explanation. The observed results are more in line with the Bhagwati-Dehejia hypothesis, which posits a link from trade to wages through volatility, labour turnover, and jobless spells.

Freer Trade and Wages of the Unskilled: Is Marx Striking Again?

This paper was prepared for the Workshop on Trade and Wages at the American Enterprise Institute, September 10, 1993. It draws, and builds, on earlier work by Bhagwati (1991a), done at the Russell Sage Foundation whose financial support during 1990-1991 is gratefully acknowledged

Optimal Restructuring Under a Political Constraint: A General Equilibrium Approach

This paper considers the generalized second-best analytics of optimal restructuring under a political constraint, building on the modeling approach in Dehejia (1997). It is shown that the second-best optimum entails administering the terms of trade shock fully at the initiation of the reform, just as in shock therapy, but that this must be supplemented with interventions in domestic factor markets. The effects of these interventions are to speed up the exit of the politically affected factor, labour, and of retarding the exit of the other factor, capital, both of which serve to prop up the wages of workers in the declining sector and hence address the political constraint. The results are in the spirit of the neoclassical theory of distortions and welfare: the optimal intervention targets the affected margin directly, in consonance with the "targetting" principle of Bhagwati-Ramaswami-Johnson.http://deepblue.lib.umich.edu/bitstream/2027.42/39425/3/wp35.pd

Democracy and Development: Friends or Foes?

This paper reconsiders a long-held view that democracy is a hindrance to economic development, at least in its early stages, and, further, that authoritarianism works better than democracy, because it allows the state to mobilize more effectively the resources necessary for industrial take-off. The different experiences of India and China would appear to reinforce this conventional wisdom. The Economist sums it up thus: “A proudly democratic India that grows at 6% a year … should be congratulated for having succeeded better than a brutal anti-democratic China which grows at 10% a year.” I suggest reasons to be sceptical of this view, and argue, to the contrary, that democracy will, in the medium to longer run, promote, rather, than retard, economic development, and predict that the future experiences of India and China may bear this out. This is quite apart from the philosophical consideration that democracy and liberty are intrinsic, not merely instrumental, to the process of development. One line of reasoning rests on the classical liberal dictum, best enunciated in the last century by Friedrich von Hayek and Milton Friedman, that economic freedom and political freedom are inextricably linked. China’s pursuit of a free market, without a free society, sets up contradictory forces that will eventually lead, either to slow and painful democratization, or, more likely, a sudden political implosion, which will, obviously, set back economic development. In India’s case, democracy serves as a safety valve, through which putative losers of reform can make their voices heard. The paper considers debates around the 2004 general election, in particular, whether it could be considered a vote against further economic reform by those left out, especially the rural poor, or whether merely an anti-incumbency vote. I conclude, after sifting the evidence, that there is, indeed, a case that the defeat of the BJP-led NDA government and the electoral success of the Congress-led UPA government rested on the 1 former’s triumphalist “India Shining” campaign and the latter’s appeal to “aam admi” (the common man). To clinch the analysis, I argue that the pursuit of a more gradual and nuanced approach to further reforms, so-called “second” and “third” generation reforms, such as labour law reform, disinvestment, financial sector reform, removal of agricultural subsidies, etc., can be crafted in a manner to be politically feasible, under the twin rubrics of “inclusive l

Shock Therapy vs. Gradualism: A Neoclassical Perspective

This paper considers the "shock therapy" vs. "gradualism" debate in the transition economics literature. It stresses the primacy of political economy considerations, which arise naturally when reforming policy makers do not have to lump-sum redistributive instruments. The paper summarizes the results of recent research by the author, which considers the implications of embedding an explicit model of policy formation into an otherwise standard, neoclassical model of structural adjustment. There are two principal findings. First, when adjustment cost: are very high, shock therapy will be politically infeasible, because it will not command majority support in a binary contest over the status quo. Second, in such cases, it is possible to construct a gradualist alternative which is politically feasible, which occurs because the pivotal group of voters (workers who begin in the declining sector) will perceive a net increase in the present value of their earnings vis-a-vis the status quo. Furthermore this gradualist alternative is dynamically consistent, in the sense that workers who choose to support reform at its inception will never wish to abandon it.