Labour standards and the race to the bottom

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Labour competition


From The Economist, in November 2013:

“Globalisation sceptics often warn of the pernicious effects on labour standards of international competition for investment. In the race for foreign business, the argument goes, countries cut back on regulation and enforcement of decent working conditions in order to lower labour costs.”

There is not a lot of economic research on this question, it notes. But then it looks at a recent paper by Ronald B. Davies and Krishna Chaitanya Vadlamannati looking at data for 135 countries over 18 years (though only up to 2002). Their paper focuses on 37 indicators of labour rights and standards: such as whether workers can bargain collectively, the right to protest and the elimination of all forms of forced labour. 

The Economist continues:

“During the 1980s and 1990s, the labour-rights index fell precipitously (see the blue line below). The authors reckon this is down to competition for foreign direct investment.”

The authors’ graph shows this:

Labour standards

The authors find that ‘competition’ for investment between countries is behind this trend, and it turns out that it’s not so much the laws and rules themselves, but the enforcement of these laws and rules that is behind the trend seen here. This is the kind of thing we’ve often seen with things like tax and financial regulation.

Today’s FG blogger is no expert in labour standards, so will present this without further comment, other than to add that ‘competition’ or rivalry between jurisdictions occurs in many different walks of economic life, and the losers are so often workers and less fortunate members of society.

Here’s the abstract from the paper itself.

Labour standards




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