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Asymmetric Labor Markets and the Location of Firms - Are Multinationals Attracted to Weak Labor Standards?

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Author Info

  • Alireza Naghavi

    (University College Dublin)

Abstract

This paper studies the strategic behavior of multinationals towards weak labor standards in developing countries (South). Without a marginal cost pricing policy, abundant labor in the South gives firms the power to set wages through their choice of output. A strategic reduction in output offsets or weakens direct gains from lower wages. In an open economy, it also increases output and profits of a competitor that operates in a perfect labor market. These effects lower profitability of locating in the South casting doubts on traditional beliefs that multinationals are always attracted to lower wages. Adopting standards enhances Southern welfare unambiguously.

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File URL: http://www.ucd.ie/economics/research/papers/2003/WP03.23.pdf
File Function: First version, 2003
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200323.

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Length: 28 pages
Date of creation: 14 Oct 2003
Date of revision:
Handle: RePEc:ucn:wpaper:200323

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Related research

Keywords: Labor standards; Labor market imperfection; Oligopsony; Location of firms; Wages; Strategic behavior; Multinationals; Welfare;

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References

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  1. Drusilla K. Brown & Alan V. Deardorff & Robert M Stern, 2002. "The Effects of Multinational Production on Wages and Working Conditions in Developing Countries," Working Papers 486, Research Seminar in International Economics, University of Michigan.
  2. James Brander & Paul Krugman, 1980. "A "Reciprocal Dumping" Model of International Trade," Working Papers 405, Queen's University, Department of Economics.
  3. Martin, Will & Maskus, Keith E, 2001. "Core Labor Standards and Competitiveness: Implications for Global Trade Policy," Review of International Economics, Wiley Blackwell, vol. 9(2), pages 317-28, May.
  4. W. Max Corden & Neil Vousden, 1998. "Paved With Good Intentions: Social Dumping And Raising Labour Standards In Developing Countries," Departmental Working Papers 1998-03, The Australian National University, Arndt-Corden Department of Economics.
  5. Maskus, Keith E., 1997. "Should core labor standards be imposed through international trade policy?," Policy Research Working Paper Series 1817, The World Bank.
  6. Dewit, Gerda & Dermot Leahy & Catia Montagna, 2003. "Employment protection and globalisation in dynamic oligopoly," Royal Economic Society Annual Conference 2003 57, Royal Economic Society.
  7. Alan Manning & Ted To, 2002. "Oligopsony and Monopsonistic Competition in Labor Markets," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 155-174, Spring.
  8. Drusilla Brown & Alan Deardorff & Robert Stern, 1998. "Trade and Labor Standards," Open Economies Review, Springer, vol. 9(2), pages 171-194, April.
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Cited by:
  1. Oslington, Paul, 2005. "Trade and the distributional politics of international labour standards," MPRA Paper 963, University Library of Munich, Germany.

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