Trade and Labor Standards: A Review of the Theory and New Empirical Evidence

Abstract

Despite its exclusion from the Doha agenda, the issue of labor standards remains an intensely discussed subject among economists, policymakers, international agencies and nongovernmental organizations. In the past few years, both World Trade Organization (WTO) and International Labor Organization (ILO) member states have agreed that labor standards should not be used for protectionist purposes and that ignorance of, and deliberate violations of core labor standards to achieve comparative advantage, should be avoided. Member states of these two organizations have also made clear commitments to the adherence of core labor standards (as evidenced, for example, by the Singapore Ministerial Declaration of 1996 or the ILO Declaration on Fundamental principles and Rights at Work of 1998). Since the WTO Singapore Ministerial declaration, the International Labor Organization (ILO) has been very active, and it recently published a voluminous report on the “Social Dimensions of Globalization” that reaffirms its promotional approach to labor standards, regularly reporting on commitments made by countries and supporting them through technical cooperation. During the fourth round of WTO talks in Doha in 2001, ministers stated that “We reaffirm our declaration made at Singapore Ministerial Conference regarding internationally recognised core labour standards. We take note of work under way in the International Labour Organisation (ILO) on the social dimension of globalisation”. Such statements do not rule out the possibility that the WTO will be called upon in the future to link social issues to trade agreements, which in our view, would open an unnecessary window (after environmental standards) for more non-trade issues such as human rights or social development. In fact, at the regional level, many preferential-trade agreements already include social clauses. In this paper, we review the theoretical and empirical literature examining the issue of trade and labor standards. In the first part of the paper, we survey the theoretical literature on trade and labor standards and extract the main analytical arguments from that literature. In the second part of the paper, we use new data on labor standards to examine 1) the conventional wisdom that countries with lower standards obtain (unfair)advantages in trade and 2) the relationship between openness and labor standards. Our estimates are based on cross country regressions for developing countries and builds on the work done by Dehejia and Samy (2004), and Rodriguez and Samy (2002). While much of the literature tends to emphasize the labor cost effects of standards, non-labor cost effects in the form of stability and improvements in trade competitiveness cannot be automatically ruled out, and hence the relationship between labor standards and trade may not be as clear as one would hope. Our estimates provide rather weak evidence in favor of the conventional wisdom and we find no evidence that trade openness has led to a worsening of labor standards (i.e. child labor).