International Labor Standards and Southern Competition

This paper models the economic aspects of labor standards in an oligopolistic framework of three countries, incorporating labor-management negotiations in the North and monopsonic labor markets in Southern countries. Different from the literature, a higher LS not only requires a higher cost, but also benefits workers and induces them to work harder. Because of theselinks, Northern intervention, via import taxes or minimum LS regulation, may often have perverse effects on Southern countries. Nevertheless, such interventions may occur due to domestic unionization or pressure from global competition. Specifically, imposing a tariff against a certain Southern country to force up its LS does not work. Further, the tariff would shift production to another country. These shed light on why developing countries oppose including LS in WTO negotiations. We also find that union wages, employment and utility increase with a higher import tariff, which explains why unions are keen lobbies of raising LS in developing countries. Under minimum LS regulation in one Southern country, the LS and profits in the other Southern country and the utility of the Northern union may fall. Finally, as the empirical evidence shows, we demonstrate that multinational enterprises choose to locate in those developing countries whose LS is relatively higher rather than lower, because LS benefits workers and labor unions, and is thus productive.