The two-way interaction between globalization and labour market policies

Labour market and social policies both affect and are affected by the process of trade liberalization and globalization. This two-way interaction and the feedback effects are the focus of this paper. The analysis is mainly conceptual—but examples are illustrated throughout, based mainly in the context of labour markets in North America, Latin America and the Caribbean basin. Attention is paid to outlining the mechanisms whereby globalization and trade liberalization affect labour market and social policy initiatives, and the extent to which these pressures will lead to a harmonization of legislative and policy initiatives, and if that harmonization will necessarily be downward to the lowest common denominator. The paper concludes that: (1) the pressures will lead towards policy harmonization; (2) the harmonization generally will be downwards; (3) such harmonization is not always negative as generally perceived; (4) efficient regulatory and social policy initiatives will survive and indeed expand, with the “rent-protecting” ones under most pressure to dissipate; and (5) pure distributional or equity-oriented initiatives that have no positive feedback effect on efficiency, unfortunately, will also be under jeopardy to dissipate, and this is a serious policy concern. Alternatives for addressing this concern are discussed, as are their associated problems.