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Asymmetric Labor Markets, Southern Wages and the Location of Firms

  • Alireza Naghavi

This paper studies the behavior of firms towards weak protection of labor standards in developing countries (South). A less than perfectly elastic labor supply in the South gives firms an oligopsony position in the labor market tempting them to strategically reduce output to cut wages. In an open economy, competitors operating where labor standards are recognized meanwhile enjoy less aggressive competitors and raise output. Delocation also increases Southern wages and triggers a competition effect, lowering ex post output and hence potential profits of a relocating firm. These effects reduce relative profitability of moving production to the South casting doubts on traditional beliefs that multinationals are attracted to regions with lower wages. Moreover, adopting a minimum wage policy in the South eliminates the oligopsony distortion and improves competitiveness of Southern firms in the world product market. It also enhances consumer and wage surplus in the South and hence unambiguously raises Southern welfare. Copyright � 2007 The Author; Journal compilation � 2007 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 11 (2007)
Issue (Month): 3 (08)
Pages: 463-481

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Handle: RePEc:bla:rdevec:v:11:y:2007:i:3:p:463-481
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  1. Drusilla Brown & Alan Deardorff & Robert Stern, 1998. "Trade and Labor Standards," Open Economies Review, Springer, vol. 9(2), pages 171-194, April.
  2. Dewit, Gerda & Dermot Leahy & Catia Montagna, 2003. "Employment protection and globalisation in dynamic oligopoly," Royal Economic Society Annual Conference 2003 57, Royal Economic Society.
  3. 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.
  4. Maskus, Keith E., 1997. "Should core labor standards be imposed through international trade policy?," Policy Research Working Paper Series 1817, The World Bank.
  5. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
  6. 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.
  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.
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