Global Value Chains and Labor Standards: The Race-to-the-Bottom Problem

We ask how globalization affects a government's incentives to set labor standards for its workers. In a stylized equilibrium model of global value chains, we find two contrasting results. First, each country chooses stricter labor standards with globalization than it would under autarky, because labor standards are a normal good and the general increase in incomes from globalization increases demand for them. We call this the effect of `globalization in the large.' Second, if more countries join the world economy so that globalization increases at the margin, labor standards worsen (improve) at the margin if a country is competing with countries that are very similar to (different from) itself. We call this the effect of `globalization at the margin.' In equilibrium, labor standards are actually stricter than optimal because each country is able to pass some of the costs of its improved labor standards onto other countries (consumers of the final good, for example).