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Asymmetric labor markets and the location of firms: Are multinationals attracted to weak labor standards?

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  • Alireza Naghavi

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.

Suggested Citation

  • Alireza Naghavi, 2003. "Asymmetric labor markets and the location of firms: Are multinationals attracted to weak labor standards?," Working Papers 200323, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:200323
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    File URL: http://hdl.handle.net/10197/1787
    File Function: First version, 2003
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    References listed on IDEAS

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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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    More about this item

    Keywords

    Labor standards; Labor market imperfection; Oligopsony; Location of firms; Wages; Strategic behavior; Multinationals; Welfare; International business enterprises--Location; Labor laws and legislation--Developing countries; Industrial location--Effect of labor market on;
    All these keywords.

    JEL classification:

    • J80 - Labor and Demographic Economics - - Labor Standards - - - General
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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