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Asymmetric Labor Markets and the Location of Firms - Are Multinationals Attracted to Weak Labor Standards?

  • Alireza Naghavi

    (University College Dublin)

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.

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File URL: http://www.ucd.ie/economics/research/papers/2003/WP03.23.pdf
File Function: First version, 2003
Download Restriction: no

Paper provided by School of Economics, University College Dublin in its series Working Papers with number 200323.

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Length: 28 pages
Date of creation: 14 Oct 2003
Date of revision:
Handle: RePEc:ucn:wpaper:200323
Contact details of provider: Postal: UCD, Belfield, Dublin 4
Phone: +353-1-7067777
Fax: +353-1-283 0068
Web page: http://www.ucd.ie/economics

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  1. Maskus, Keith E., 1997. "Should core labor standards be imposed through international trade policy?," Policy Research Working Paper Series 1817, The World Bank.
  2. James Brander & Paul Krugman, 1980. "A "Reciprocal Dumping" Model of International Trade," Working Papers 405, Queen's University, Department of Economics.
  3. Dewit, Gerda & Dermot Leahy & Catia Montagna, 2003. "Employment protection and globalisation in dynamic oligopoly," Royal Economic Society Annual Conference 2003 57, Royal Economic Society.
  4. Drusilla K. Brown & Alan V. Deardorff & Robert M. Stern, 2003. "The Effects of Multinational Production on Wages and Working Conditions in Developing Countries," NBER Working Papers 9669, National Bureau of Economic Research, Inc.
  5. 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.
  6. Drusilla Brown & Alan Deardorff & Robert Stern, 1998. "Trade and Labor Standards," Open Economies Review, Springer, vol. 9(2), pages 171-194, April.
  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.
  8. W. Max Corden & Neil Vousden, 1998. "Paved With Good Intentions: Social Dumping And Raising Labour Standards In Developing Countries," Departmental Working Papers 1998-03, The Australian National University, Arndt-Corden Department of Economics.
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