Discussion Paper
No. 0142
Do Labour Standards Affect Comparative
Advantage? Evidence for Labour-intensive
Goods
Matthias Busse
December 2000
Adelaide University
Adelaide 5005 Australia
CENTRE FOR INTERNATIONAL ECONOMIC STUDIES
The Centre was established in 1989 by the Economics Department of the Adelaide
University to strengthen teaching and research in the field of international economics
and closely related disciplines. Its specific objectives are:
•
to promote individual and group research by scholars within and outside the
Adelaide University
•
to strengthen undergraduate and post-graduate education in this field
•
to provide shorter training programs in Australia and elsewhere
•
to conduct seminars, workshops and conferences for academics and for the wider
community
•
to publish and promote research results
•
to provide specialised consulting services
•
to improve public understanding of international economic issues, especially
among policy makers and shapers
Both theoretical and empirical, policy-oriented studies are emphasised, with a
particular focus on developments within, or of relevance to, the Asia-Pacific region.
The Centre’s Director is Professor Kym Anderson (kym.anderson@adelaide.edu.au)
and Deputy Director is Dr Randy Stringer (randy.stringer@adelaide.edu.au)
Further details and a list of publications are available from:
Executive Assistant
CIES
School of Economics
Adelaide University
SA 5005 AUSTRALIA
Telephone: (+61 8) 8303 5672
Facsimile: (+61 8) 8223 1460
Email: cies@adelaide.edu.au
Most
publications
can
be
http://www.adelaide.edu.au/cies/
downloaded
ISSN 1444-4534 series, electronic publication
from
our
Home
page:
CIES DISCUSSION PAPER 0142
Do Labour Standards Affect Comparative
Advantage? Evidence for Labour-intensive Goods
Matthias Busse
Centre for International Economic Studies and
School of Economics
University of Adelaide
cies@adelaide.edu.au
November 2001
Do Labour Standards Affect Comparative Advantage?
Evidence for Labour-intensive Goods
Matthias Busse
November 2001
Abstract
This paper focuses on the question of whether labour standards can affect comparative
advantage in unskilled-labour-intensive goods, and thereby influence trade flows. Using a
Heckscher-Ohlin framework, the effects of low labour standards depend on the type of
standard: Forced and child labour lead to an increase in the endowment of unskilled labour,
and hence improve comparative advantage in unskilled-labour-intensive goods; the opposite
occurs with discrimination against females; and with basic trade union rights, the outcome is
ambiguous. The empirical results confirm the theoretical outcome, but also show that weaker
union rights are associated with a stronger comparative advantage.
JEL Classification: F1, F14
Key Words: Comparative Advantage, Trade, Labour Standards
Contact:
Matthias Busse
Hamburg Institute of International Economics
Hamburg, Germany
Email: busse@hwwa.de
I.
Introduction
The debate over whether labour standards should be imposed in international trade has come
to the forefront of the international trade policy agenda in recent years. It has attracted not
only interest from economists, governments and trade policy agencies, but also a large public
audience, including humanitarian organisations, partly due to concerns about the increasing
globalisation of the world economy. Unlike the more recent disputes about environmental
standards, the discussion about labour standards has been on and off the policy agenda since
the late nineteenth century. In 1890, for example, the United States banned the entry of
foreign goods manufactured by convict labour. Seven years later, the British Parliament
prohibited imports of goods produced in “any foreign prison, gaol, house of correction or
penitentiary” (quoted in Charnovitz, 1987, pp. 569-70).
More recently, during the Uruguay Round of GATT talks, the United States and France tried
unsuccessfully to put labour standards on the agenda. The next attempts, at the WTO
conferences in Singapore in 1996 and in Seattle in 1999, again failed. Unlike its predecessor,
the current Bush administration seems to have lost interest in international labour standards.
As a consequence, the United States, previously one of the main supporters of labour
standards within the framework of the WTO, is not driving the matter forward as before.
The European Union, on the other hand, is still calling for discussion of links between trade
and fundamental workers' rights and brought the issue forward at the WTO conference in
Doha in November 2001. This attempt was rejected by developing countries, which fear that
rich nations will seek to justify protectionist measures against foreign competition by alleging
their rivals abuse workers' rights. It has been agreed that the issue of labour standards remain
in the sphere of influence of the International Labour Organisation (ILO). The WTO has been
asked, however, to “take note of work under way in the ILO on the social dimension of
globalisation” (WTO, 2001) and will hold talks on an expert level about labour standards.
Since trade unions, human right activists, and some governments of developed (high standard)
countries show an ongoing interest in the matter, it is highly likely that labour standards will
appear on the agenda of future international trade talks again and remain an important issue of
international trade policy.
The international discussion of the relationship between labour standards and international
trade consists basically of two issues: (1) Whether countries can improve their
competitiveness, and therefore increase production and exports of labour-intensive goods with
lower labour standards, and (2) whether there might be, partly as a result of the first issue,
“social dumping” and a “race to the bottom” on such standards. To ensure a “level playing
field”, advocates of labour standards then go on to favour effective import barriers against
products imported from countries with low labour standards, preferably within the WTO.
This paper concentrates on the first issue and focuses on the question of whether countries can
derive comparative advantage in unskilled-labour-intensive goods from low labour standards,
and thereby influence trade flows. Since the impact of labour standards is likely to be felt
most strongly in unskilled-labour-intensive goods, only these goods are considered in the
analysis. Apart from discussing the underlying theoretical aspects, the paper consists of an
empirical test of the influence of labour standards on exports of unskilled-labour-intensive
goods.
Accordingly, the paper is structured as follows: After a brief introduction to different concepts
of labour standards in the next section, previous empirical work is reviewed in Section III.
Sections IV and V consider the trade and welfare effects of labour standards and changes in
factor endowments from a theoretical point of view. Section VI presents the estimation results
and finally, some concluding remarks as well as a summary of the major results are found in
Section VII.
II.
Definition and Scope of Labour Standards
Partly as a result of the lack of agreement on a definition or a common list of labour
standards, the discussion about any effects on trade and comparative advantage has become
increasingly confusing. Obviously, labour standards vary from country to country, depending
on the income level as well as cultural, political, and social preferences and conditions
(Brown et al., 1998). As the choice of labour standards will definitely influence empirical
results, it is necessary to outline carefully the set of labour standards used. For the purposes of
analysing the effects on comparative advantage and trade, and for more clarity, the distinction
between “core” and other labour standards is crucial. Core (or fundamental) labour standards
focus on important human rights and include basic union rights, freedom from forced labour,
equal opportunity in employment, and the abolition of child labour.
Other standards, like minimum wages or safety and health standards in the workplace, are
related to actual labour market and working conditions. These other labour standards,
sometimes called “acceptable conditions of work”, are highly controversial, whereas core
labour standards receive almost universal acceptance. This can be seen from the fact that more
than 130 countries have ratified three United Nations acts on core labour standards
(UN, 2001).1
Apart from the United Nations acts, the ILO conventions on core labour standards come close
to an internationally agreed set of standards. The ILO was created in 1919 primarily for the
purpose of adopting international standards to cope with the problem of labour conditions
involving "injustice, hardship and privation" (ILO, 2001a). Even though the ILO standard
setting mandate was broadened in 1944 to include more general, but related, social policy and
human and civil rights matters, core labour standards remained one of the most important
issues. International labour standards are essentially expressions of international tripartite
agreement on these matters. The tripartite representatives consist of workers’ and employers’
organisations and governments. Since its foundation, the ILO has adopted more than 180
conventions, which are international treaties subject to ratification by ILO member states, and
more than 190 recommendations, which are purely advisory and non-binding instruments. As
the ILO does not have any enforcement power, it relies on voluntary compliance and monitors
the carrying out of the ratified conventions.
There are eight ILO conventions on core labour standards. These include two conventions,
each on union rights, forced labour, child labour, and discrimination (see Table 1). The total
number of ratifications varies, but they are in the range of 140 to 160, but for those two on
child labour. Even though there is widespread agreement on the principles of these
conventions, only 63 countries have ratified all eight. In some cases, the exact wording or the
interpretation of these conventions might be incompatible with national laws or regulations
(OECD, 1996). Partly for this reason, the United States, for example, has ratified only two
conventions on core labour standards. On the other hand, the ratification of a particular
1
The three United Nations acts are (1) the Covenant on Economic, Social and Cultural Rights, (2) the Covenant
on Civil and Political Rights, and (3) the Convention on the Rights of the Child; see UN (2001) for details.
convention is not necessarily a good indicator for enforcement of that convention. Rwanda,
for instance, has ratified all eight conventions, but few would argue that it has higher labour
standards than the United States.
Table 1: Ratification of ILO Fundamental Labour Standards (as of November 2001)
ILO Convention
Number of countries having
ratified the convention
Union Rights
(1) Freedom of Association and Protection of the Right to Organise Convention,
1948 (No. 87)
(2) Right to Organise and Collective Bargaining Convention, 1949 (No. 98)
138
150
Forced Labour
(3) Forced Labour Convention, 1930 (No. 29)
(4) Abolition of Forced Labour Convention, 1957 (No. 105)
159
157
Child Labour
(5) Minimum Age Convention, 1973 (No. 138)
(6) Worst Forms of Child Labour Convention, 1999 (No. 182)
115
106
Discrimination
(7) Equal Remuneration Convention, 1951 (No. 100)
(8) Discrimination (Employment and Occupation) Convention, 1958 (No. 111)
154
152
Source: ILO (2001b).
III. Previous Studies of Comparative Advantage, Trade and Labour Standards
Several authors have empirically explored the relationship between the observance of certain
labour standards and comparative advantage and/or export performance.2 Aggarwal (1995)
examined growth rates of imports in the United States and the observed adherence to core
labour standards of ten developing countries. She found no positive correlation between the
two variables. Rather the opposite seems to occur, as she noted that it is common in
developing countries for labour standards to be higher in export-oriented sectors than in less
export-oriented or non-traded sectors. In addition, developing countries with higher labour
standards do not have lower import-penetration rates in the United States than countries with
lower standards.
2
See OECD (2000) and Brown (2000) for more thorough reviews. Apart from trade and comparative advantage,
most of the studies mentioned in this section have also examined the interaction between labour standards and
other economic variables like wages or foreign direct investment. For the purpose of this paper, only their results
with respect to trade and comparative advantage are reported.
The OECD (1996) focused on the relationship between two core labour standards, freedom of
association and collective bargaining rights, and measures of export performance, both in the
aggregate and for labour-intensive goods.3 They examined 78 OECD and non-OECD
countries, but found no evidence of a correlation between the observance of these union rights
and overall export performance. Furthermore, US imports of labour-intensive textile products,
where intensive competition from lower-labour-standard developing countries could be
expected, indicate that high standard countries have a large share of the US market. They
summarised their findings by concluding that the degree of observance of labour standards
has little effect on exports or patterns of specialization.
Van Beers (1998) suggested a possible negative relationship between the level of labour
standards and trade performance. Focusing on 18 OECD countries and other labour standards,
he used a combined index of standards that includes employment protection rights, fixed term
contracts, working time, minimum wages, and employees’ representation rights. He found
that higher (stricter) labour standards are negatively associated with exports of labour and
capital-intensive commodities produced with relatively more high-skilled labour.
In another study, Mah (1997) regressed export shares of GDP on the ratification of core ILO
conventions for 45 developing countries. He found that export shares are negatively
correlated with union rights like freedom of association and collective bargaining rights, but
also non-discrimination in employment and abolition of forced labour.
In his empirical work on comparative advantage and labour standards, Rodrik (1996) included
84 countries in his study and focused on the ratio of textile and clothing exports to total
exports (excluding fuels). He used control variables like the population-land ratio for the
relative labour endowment and average years of schooling for human capital as the natural
determinants of comparative advantage. As measures for the level of labour standards, he
used the number of ratifications of ILO conventions, a democracy indicator, incidence of
child labour, statutory hours worked, days of paid annual leave, and union density. Although
the variables for labour standards have the expected sign, he did not find any statistically
significant relationship. The statutory hours worked (in manufacturing) is the only exception.
3
The OECD measured export performance as the change in percentage of the change of a country’s exports in
world markets over the period 1980-1990 (OECD, 1996, p. 93).
A longer working week is positively associated with an improved comparative advantage in
textiles and clothing.
To improve the overall fit of the equation, Rodrik then divided his sample into poor and rich
countries, setting the cut-off point at US$ 6,000 per capita GDP in 1985. By concentrating on
poor countries, not only was the fit of the benchmark equation increased (from R2 = 0.10 to
R2 = 0.22), but also the child labour variable became statistically significant in some of his
regressions. A lack of child labour legislation or a weaker enforcement of the existing
legislation would lead to a higher comparative advantage in textiles and clothing.
IV. Trade and Welfare Effects
Since this paper concentrates on the effects of core labour standards on comparative
advantage in unskilled-labour-intensive goods, the choice of a Heckscher-Ohlin framework as
an appropriate model is relatively straightforward. Because it is based on different relative
factor endowments, this standard trade model has particular strengths in analysing changes in
these endowments. There are, of course, other factors that influence comparative advantage,
such as differences in technologies or consumer preferences. Yet, as will be demonstrated
below, core labour standards could particularly change relative factor endowments of a
particular country. Furthermore, the Heckscher-Ohlin model allows differentiating between
skilled and unskilled labour as the factors of production.4 This enables us to focus on
comparative advantage in unskilled-labour-intensive goods.
In its basic version, the Heckscher-Ohlin model comprises two goods (X, Y), two factors
(skilled, unskilled labour) and two countries (H, F). Production technologies are assumed to
be identical with constant returns to scale in both countries, preferences are identical and
homogeneous, and there are no market distortions. The defining characteristic of the model is
a difference in relative factor endowments. Country H (home) has a proportionally larger
unskilled labour force than country F (foreign). Good X (e.g. toys) is assumed to be unskilledlabour-intensive and good Y (e.g. software) is skilled labour-intensive. Each country produces
both goods by using both factors.
4
This approach to modelling inter-industry trade or “North-South” trade has been increasingly used: for
example, see Krugman (1995) and Golub (1997).
Suppose both countries trade with each other and fully respect labour standards in the initial
situation.5 In Figure 1a, the production possibility frontier PPF1 shows the maximum outputs
of the two goods if all resources of country H are used efficiently (PPF3 for country F in
Figure 1b). At an equilibrium price ratio P = PX/PY, where PX and PY indicate the prices for
goods X and Y, respectively, country H will produce at point Q1, consume at C1, reaching the
highest possible indifference curve U1. Since the home country (H) is assumed to be
unskilled-labour abundant, it will export good X and import good Y. The equivalent
production and consumption points for the foreign country (F) are Q4 and C4, respectively.
Now consider a decline in labour standards in country H only, using, say, unskilled prison
labour. The number of additional workers will increase the endowment of unskilled labour in
H and the PPF shifts outwards to PPF2, with a bias towards the unskilled-labour-intensive
good X.6 Since the production of X increases relative to that of Y, country H improves its
comparative advantage in the production of X. The enhanced (export) supply of X causes PX
and hence P to fall to P’, which represents a decline in the terms of trade of the home country.
The economy reaches a new equilibrium production point at Q3 (or Q2 if we had assumed a
small open economy at unchanged world market prices P), a new consumption point C3 (C2),
and a higher welfare level U3 (U2).7 Furthermore, exports of X and imports of Y increased.
Country F, on the other hand, will see only a change in the relative price level, that is, an
improvement in its terms of trade. This makes country F better off, and, hence, allows it to
reach a higher welfare level (U5). Note, however, that the fall in the production of good X is
caused by the fall in the price of the unskilled-labour-intensive good (PX). This will make its
production less profitable compared to that of good Y. Due to the decline in labour standards
in country H, the foreign country will shift its resources towards the production of Y.
5
The analysis of labour standards presented here is similar to that of Brown et al. (1996).
6
Modelling the impact of labour standards as the accumulation of production factors is merely an application of
the techniques from the literature started by Rybczynski (1955).
7
Note that the deterioration in the terms of trade could offset the welfare gains from the growth in the unskilled
labour force, thereby making the economy worse off. This phenomenon is called immiserizing growth
(Bhagwati, 1958).
Figure 1: Trade and Welfare Effects of Labour Standards
(a) Country H
Y
C2
U2
PPF2
C1
C3
PPF1
U3
U1
Q3
Q1
Q2
P
P’
P
X
(b) Country F
Y
PPF3
Q5
Q4
C5
C4
P’
U5
P
U4
X
An interesting result is the observance of an increase in consumption, trade, and welfare
levels in both countries due to declining labour standards in the home country.8 Obviously,
this result is due to the set-up of the model, as the use of prison labour will increase
8
Again, this result holds only if the possibility of immiserizing growth in country H is neglected.
production possibilities. Labour standards themselves are not included in the utility function
(OECD, 1996). Besides the fact that such an approach would complicate the analysis to a
large extent, it is also beyond the main focus of this paper, which is the effects on trade and
comparative advantage, and therefore not included in the analysis.
V.
Labour Standards and Changes in Factor Endowments
In the previous section, the effects of prison labour, as an example of forced labour and
declining labour standards, have been considered. As has been shown, prison labour increases
the total factor endowment of unskilled labour, and the country improves its comparative
advantage in unskilled-labour-intensive goods. But what about the other core labour
standards? Similar to forced labour, a lowering of the minimum age for employment, that is
the use of (more) child labour, will also increase the unskilled labour endowment. Since the
employment of children accounts for over ten per cent of the workforce in some developing
countries, the quantitative effect of child labour can be quite substantial (Shelbourne, 2001).
Besides the labour-augmenting effect, an increase in use of child labour is detrimental to
development, since it is likely that future generations of workers are less skilled and hence
less productive.9 These effects, however, are not considered in this paper.
Unlike forced and child labour, discrimination against, say, females in employment can be
expected to reduce the labour endowment. Two common types of employment discrimination
are restrictions on female work in certain sectors of the economy, like in some Islamic
countries, and lower salaries relative to male workers, even if females are as productive. Both
types will reduce the labour endowment, as females either are forced to or will voluntarily
reduce their labour supply. Whether discrimination against females will affect the relative
endowment of unskilled labour is less clear. There is, however, evidence that the educational
attainment level of females in developing countries is lower than that of males (UNDP,
2000).10 An increase in the discrimination against females will then lead, at least in the short
run, to a lower relative endowment of unskilled labour.
9
The empirical evidence is contradictory on this point. There are studies that suggest the opposite outcome. For
example, Patrinos and Psacharopoulos (1997) found that child labour in Peru ensures school enrolment of
children from some families. In addition, a few hours of work a day and schooling seemed rather to be
complementary than mutually exclusive.
10
This evidence might be, of course, due to discrimination against females in schooling and training.
Finally, basic trade union rights like freedom of association and collective bargaining have
ambiguous effects on labour endowments. The outcome depends on the motives and
intentions of trade unions and can be summarised in three points.11 First, unions might be in a
better position to protect basic workers rights and to ensure that workers are not exploited. In
these cases, a violation of basic union rights can be associated with a similar outcome to the
three above-mentioned labour standards, that is, either a rise or fall in the endowment of
unskilled labour.
Second, unions might introduce further distortions in the labour market. They could try to
raise wages for unionised workers above market levels. As firms are likely to hire fewer
workers at higher wage rates, this policy option would lead to a fall in the number of
employed workers.12 And third, there might be productivity gains due to labour union
activities, since workers may be more motivated and hence productive (OECD, 2000). This
effect, which could be enhanced if union activity leads to better social relationship between
workers and employers, would shift the PPF outwards, but not necessarily with a bias towards
the production of the unskilled-labour-intensive good. Depending on the relative size of these
three effects, the endowment of unskilled labour could either rise or fall.
To sum up, from a theoretical point of view, the effects of a decline in labour standards
depend on the type of labour standard. Forced and child labour would lead to a increase in the
endowment of unskilled labour, and hence improve comparative advantage in unskilledlabour-intensive goods, the opposite would occur with discrimination against females, and
with basic trade union rights the outcome is ambiguous.
VI. Empirical Evidence
Before presenting the empirical results, let us first have a look at the data used. Comparative
advantage in unskilled-labour-intensive goods is measured as the ratio of unskilled-labour11
12
See Booth (1995) for a more thorough survey on the effects of trade unions.
This effect will occur only if there are no further distortions like, say, a monopsony in the labour market. With
monopsony power of a firm, a higher wage rate would lead to higher employment levels. See Maskus (1997) and
Martin and Markus (2001) for a discussion of the effects with different labour market distortions.
intensive exports to total exports of goods (the variable is labelled EXLAB98).13 The focus is
on manufactured goods only. But what are unskilled-labour-intensive manufactured goods?
The classification is based on two determinants: technology and labour intensity. Among all
manufacturing industries, included in the analysis are those commodities that involve both
low technology and high labour intensity. Data on technology intensity was obtained from the
OECD (2001) Science, Technology and Industry Scoreboard,14 whereas labour intensity is
based on value added per worker.15 Included in the analysis are exports of commodity
categories such as textiles, clothing, footwear, and toys (see Appendix A for a complete list).
Comparative advantage is determined foremost by relative factor endowments. Consequently,
for relative labour endowments two control variables are used: first, the total labour force
divided by the land area (LABDENS), which is expected to be positively associated with
EXLAB98; and, second, the educational attainment index (EDU) of the United Nations
Development Programme, which is based on average years of schooling in the above-25
population and the illiteracy rate. This index is used as a proxy for the skill level of the labour
force and is expected to be negatively associated with EXLAB98.16
As a measure of core labour standards, five indicators are used:
(1) LABFEM for the degree of discrimination against women in working life, representing
the female labour force activity rate, which is the percentage of female population ages
15-64 that are working.17
(2) CHILD as an indicator for the prevalence of child labour, defined as the percentage of
children ages 10-14 who are not working.18
13
Section III showed the theoretical effects, using a 2x2x2 Heckscher-Ohlin model. The graphical representation
of the model has been limited to this simple case to show the basic trade and welfare effects. The model can be
extended to, say, four goods, including two export and two import goods. Comparative advantage can then be
interpreted in terms of export structure, or the ratio of unskilled labour-intensive exports to total exports.
14
According to the OECD (2001), the three determinants of technology intensity are the ratio of research and
development (R&D) expenditures to value added, R&D expenditures divided by production and R&D
expenditures plus technology embodied in intermediate and investment goods divided by production.
15
The commodity classification of labour-intensive goods is based on the work of Tyres at al. (1987).
16
See Appendix B for data sources of all variables. Included in the analysis were all 83 countries reporting
export data for the considered commodity categories but Singapore, which is a city-state and has an unusually
high labour force-to-land ratio.
17
Due to differences in the male labour force activity rate across countries, one might argue that variances in this
indicator do not represent discrimination against females in all cases. However, neither the sign nor the
significance of the estimation results, represented below, change if differences between the two activity rates are
used instead.
(3) CIVIL, the civil liberties indicator of the Freedom House (2000) for forced labour. This
non-governmental organisation monitors fundamental democratic and human rights in all
countries. Apart from political rights, it rates civil liberties separately on a scale from 1 to
7, with 1 representing the least free and 7 the most free.19 Even though the Freedom
House checklist for civil liberties covers a large range of issues, it also deals with forced
labour. However, we have to keep in mind that there are other labour standards like union
rights included in the checklist as well, and the interpretation of this indicator is less
straightforward.
(4) UNION for basic union rights like freedom of association and collective bargaining. This
is the OECD (1996, 2000) indicator for union rights. Based on reports from international
trade union organisations and the ILO, the OECD graded countries on a scale from
1 (union rights practically non-existent) to 4 (union rights guaranteed in law and
practice).20
(5) CONVEN for the number of ratifications of the eight ILO conventions on core labour
standards.
In Table 2, the estimation results for six regressions are reported, based on data for the year
1998. In the benchmark regression, reported in the first column, the two explanatory variables
having the expected signs are both statistically significant at the 1 per cent level. In the
remaining columns, the coefficients for the five indicators for labour standards are reported.
LABFEM, CHILD and CIVIL have all the expected signs and are statistically significant at
the 1 per cent or 5 per cent level.21 A higher level of discrimination against females, that is, a
decline in labour standards, is associated with a declining endowment of unskilled labour and,
hence, a weaker comparative advantage in unskilled-labour-intensive goods.
18
Note that this indicator measures the non-prevalence of child labour. To simplify the interpretation of the
results, a higher number in any of the five indicators always implies a higher labour standard.
19
Again, the scale has been reversed.
20
The scale from 1 to 4 has been defined exactly opposite to that of the OECD to ensure an easier interpretation
of the following results
21
Unfortunately, there is evidence of multicollinearity between the educational attainment index EDU and
CHILD, CIVIL and UNION. Since LABDENS has a stronger relative influence on EXLAB98 than EDU and, in
one of the regressions, CHILD is likely to be a substitute for EDU, the educational attainment index in these
three regressions has been omitted.
The opposite occurs for child and forced labour: Lower standards lead to an increase in the
labour force and a stronger comparative advantage in unskilled-labour-intensive goods. For
example, a decline in the number of children that are not working (that is, an increase in child
labour) by one percentage point, would lead to a rise in the ratio of unskilled-labour-intensive
exports to total exports by 0.43 percentage points.
Table 2: Comparative Advantage and Core Labour Standards
Independent
Variables
Dependent Variable: EXLAB98
Constant
0.455***
(0.092)
0.432***
(0.090)
0.502**
(0.198)
0.244***
(0.056)
0.250***
(0.058)
0.411***
(0.104)
LABDENS
0.843***
(0.186)
0.709***
(0.188)
0.906***
(0.199)
1.048***
(0.192)
1.051***
(0.183)
0.849***
(0.186)
EDU
-0.428***
(0.104)
-0.544***
(0.112)
LABFEM
CHILD
CIVIL
UNION
CONVEN
-0.443***
(0.106)
0.355**
(0.145)
-0.429**
(0.203)
-0.031***
(0.010)
-0.058***
(0.017)
0.008
(0.009)
R2
0.36
0.41
0.27
0.31
0.46
0.37
N
82
82
82
82
56
82
Notes: See Appendix B for data sources; standard errors, which have been checked for heteroskedasticity, are
reported in parentheses; *** significant at 1% level; ** significant at 5% level; * significant at 10% level.
Whereas the effects of declining basic union rights are ambiguous on theoretical grounds, the
sign for UNION is negative and the parameter is highly significant at the 1 per cent level.
Hence, in the case of the 82 countries included in the analysis, weaker union rights are
associated with an improving comparative advantage in unskilled-labour-intensive goods.
The number of ratifications of the fundamental eight ILO conventions appears not to
significantly affect comparative advantage in exports of labour-intensive goods. CONVEN is
just above zero and not statistically significant. In addition, as can be seen from Table 3, the
number of ratifications is a poor measure of the level of labour standards. The partial
correlations between the number of ratifications for each of the four core labour standards
(CONDISC for discrimination and the number of ratifications of Conventions No. 100 and
No. 111, CONCHILD for child labour (No. 138 and No. 182), CONFORCE for forced labour
(No. 29 and No. 105) and CONUNION for union rights (No. 87 and No. 98)) and my
equivalent indicators are all at or below 0.2. The partial correlation for the discrimination
against females is even (slightly) negative.
Table 3: Ratifications of Fundamental ILO Conventions
and Level of Labour Standards
Variables
Partial Correlation
LABFEM / CONDISC
-0.02
CHILD / CONCHILD
0.07
CIVIL / CONFORCE
0.19
UNION / CONUNION
0.20
See Appendix B for data sources.
Based on these results, one might argue that, by lowering some labour standards, a developing
country can easily improve its comparative advantage in unskilled-labour-intensive goods.
Even though the first four measures of labour standards have a statistically significant impact
on the variations of exports, the results have to been seen in the perspectives of their relative
impact. In all regressions, the relative labour endowment and the educational attainment level
have a stronger influence on comparative advantage.22 Nevertheless, labour standards can still
have an impact on comparative advantage.
VII. Concluding Remarks
The main argument of this paper has been that labour standards can affect comparative
advantage in unskilled-labour-intensive goods. It has been shown that once all commodity
categories of unskilled-labour-intensive goods and control variables are included in the
analysis, a (negative) statistical significant relationship between comparative advantage and
the level of core labour standards can be found for the 82 countries included in the analysis.
The empirical results do not, however, point in the same direction. Whereas forced and child
labour would increase the endowment of unskilled labour, and enhance comparative
22
The relative influence of a variable can be measured by standardised coefficients (beta). The results are
reported in Appendix C.
advantage in unskilled-labour-intensive goods, discrimination against females would lead to
the opposite result. The effects of basic trade union rights are ambiguous in theory, but the
empirical results show that weaker union rights are associated with a stronger comparative
advantage in unskilled-labour-intensive goods.
A final observation concerns the fundamental relation between labour standards and
comparative advantage as well as the question of whether there might be “a race to the
bottom” on such standards. In the previous literature and in this paper, it has been assumed
that labour standards can be determined exogenously. It is quite clear that other labour
standards like working conditions (i.e. wages, working hours, days of paid leave) are
generally determined endogenously. One might argue that the same holds for core labour
standards. Even though legislation and enforcement of core labour standards are more easily
set by national governments, they could still be determinant endogenously to a certain degree.
If this is the case, all results with respect to causation should be interpreted cautiously and
concerns over unfair advantages due to low standards could be seen from a different
perspective. Nevertheless, it underlines the need for further research in this area.
References
Aggarwal, Mita (1995), International Trade, Labor Standards, and Labor Market Conditions:
An Evaluation of Linkages, US International Trade Commission, Office of Economics
Working Paper No. 95-06-C, June.
Bhagwati, Jagdish N. (1958), “Immiserizing Growth: A Geometric Note,” Review of
Economic Studies, Vol. 25, pp. 201-205.
Booth, Alison L. (1995), The Economics of the Trade Union, Cambridge: Cambridge
University Press.
Brown, Drusilla K. (2000), International Trade and Core Labour Standards: A Survey of the
Literature, OECD Labour Market and Social Policy – Occasional Papers No. 43, Paris:
OECD.
Brown, Drusilla K.; Deardorff, Alan V. and Stern, Robert M. (1996), “International Labor
Standards and Trade: A Theoretical Analysis”, in Jagdish Bhagwati and Robert Hudec
(eds.), Fair Trade and Harmonization: Prerequisites for Free Trade? Vol. 1 Economic
Analysis, Cambridge, MA: Cambridge University Press, pp. 227-280.
Brown, Drusilla K.; Deardorff, Alan V. and Stern, Robert M. (1998), “Trade and Labor
Standards”, Open Economies Review, Vol. 9, pp. 171-194.
Charnovitz, Steve (1987), “The Influence of International Labour Standards on the World
Trading Regime: A Historical Overview”, International Labour Review, Vol. 126,
No. 5, September-October, pp. 565-584.
Freedom House (2000), Freedom in the World: The Annual Survey of Political Rights and
Civil Liberties 1998-1999, Internet posting: http://www.freedomhouse.org.
Golub, Stephen S. (1997), “International Labor Standards and International Trade,” IMF Staff
Studies for the World Economic Outlook, pp. 94-110.
ILO (2001a), About the International Labour Organization, Internet posting:
http://www.ilo.org.
ILO (2001b), Ratifications of the ILO Fundamental Conventions, Internet posting:
http://webfusion.ilo.org/public/db/standards/normes/appl/applratif8conv.cfm?Lang=EN.
ITC (2000), Trade Analysis System PC-TAS 1994-1998, ITC (International Trade Center) and
United Nations Statistics Division, Trade Data on CD-ROM.
Krugman, Paul R. (1995), Technology, Trade, and Factor Prices. NBER Working Paper
No. 5355.
Mah, Jai S. (1997), “Core Labor Standards and Export Performance in Developing
Countries”, The World Economy, Vol. 20, No. 6, September, pp. 773-785.
Martin, Will and Maskus, Keith (2001), “Core Labor Standards and Competitiveness:
Implications for Global Trade Policy”, Review of International Economics, Vol. 9,
No. 2, pp. 317-328.
Maskus, Keith (1997), Should Core Labor Standards be Imposed Through International
Trade Policy? World Bank Policy Research Working Paper No. 1817.
OECD (1996), Trade, Employment and Labour Standards: A Study of Core Workers’ Rights
and International Trade, Paris: OECD.
OECD (2000), International Trade and Core Labour Standards, Paris: OECD.
OECD (2001), OECD Science, Technology and Industry Scoreboard: Towards a Knowledgebased Economy, Paris: OECD.
Patrinos, Harry A. and Psacharopoulos, George (1997), “Family Size, Schooling and Child
Labor in Peru”, Journal of Population Economics, Vol. 10, No. 4, pp. 387-405.
Rodrik, Dani (1996), “Labor Standards in International Trade: Do They Matter and What Do
We Do About Them”, in Robert Z. Lawrence, Dani Rodrik and John Whalley (eds.),
Emerging Agenda For Global Trade: High States for Developing Countries,
Washington Overseas Development Council Essay No. 20, Baltimore: Johns Hopkins
University Press, pp. 35-79.
Rybczynski, Tadeusz M. (1955), “Factor Endowment and Relative Commodity Prices”,
Economica, Vol. 22, pp. 36-41.
Shelbourne, Robert C. (2001), “An Explanation of the International Variation in the
Prevalence of Child Labour”, The World Economy, Vol. 24, No. 3, March, pp. 359-377.
Tyres, Rodney; Phillips, Prue and Findlay, Christopher (1987), “ASEAN and China Exports
of Labor-intensive Manufactures: Performance and Prospects”, ASEAN Economic
Bulletin, Vol. 3. No. 3, March, pp. 339-367.
UN (2001), Treaty Bodies Database, United Nations High Commissioner for Human Rights,
Internet posting: http://www.unhchr.ch/tbs/doc.nsf.
UNDP (2000), Human Development Report 2000, Geneva: UNDP.
Van Beers, Cees (1998), “Labour Standards and Trade Flows of OECD Countries”, The
World Economy, Vol. 21, No. 1, January, pp. 57-73.
World Bank (2001), World Development Indicators, Data on CD-ROM.
WTO (2001), WTO Ministerial Declaration, Doha, Qatar, November 14, 2001, Internet
posting: http://www-svca.wto-ministerial.org.
Appendix A: Low Technology and Labour-intensive Goods
Commodity
SITC, Rev. 3
Textile yarn and fabric
Glass, glassware and pottery
65
664-666
Furniture and bedding
82
Travel goods and handbags
83
Apparel
84
Footwear
85
Baby carriages, games, toys, and sporting goods
894
Sources: OECD (2001), Tyres et al. (1987) and own assembly; see text for explanation.
Appendix B: Definition of Variables and Data Sources
Variable
Definition
Source
EXLAB98
Exports of unskilled-labour-intensive manufactured goods divided
by total exports of goods, 1998
ITC (2000)
LABDENS
Total labour force divided by land area (1,000 sq km of land), 1998
World Bank (2001)
EDU
Educational attainment index, based on average years of schooling
in the above-25 population and illiteracy rate, index from 0-1, 1998
UNDP (2000)
LABFEM
Female labour force activity rate, ages 15-64, 1998
World Bank (2001)
CHILD
Percentage of children ages 10-14 who are not working, 1998
World Bank (2001)
CIVIL
Civil liberties, scale from 1-7, 1998-99
Freedom House
(1999)
UNION
Freedom of association and collective bargaining rights of unions,
scale from 1-4, 1999
OECD (1996, 2000)
CONVEN
Number of ratifications of the eight fundamental ILO conventions,
Nov. 2001
ILO (2001b)
CONDISC
Number of ratifications of the two fundamental ILO conventions on
discrimination No. 100 and No. 111, Nov. 2001
ILO (2001b)
CONCHILD
Number of ratifications of the two fundamental ILO conventions on
child labour No. 138 and No. 182, Nov. 2001
ILO (2001b)
CONFORCE
Number of ratifications of the two fundamental ILO conventions on
forced labour No. 29 and No. 105, Nov. 2001
ILO (2001b)
CONUNION
Number of ratifications of the two fundamental ILO conventions on
basic union rights No. 87 and No. 98, Nov. 2001
ILO (2001b)
Appendix C: Standardised Coefficients (Beta) of Regression Results
Independent
Variables
LABDENS
EDU
LABFEM
CHILD
CIVIL
UNION
CONVEN
Dependent Variable: EXLAB98
0.412
-0.372
0.346
-0.473
0.238
0.443
0.512
0.576
0.415
-0.384
-0.205
-0.281
-0.343
0.083
CIES DISCUSSION PAPER SERIES
The CIES Discussion Paper series provides a means of circulating promptly papers of
interest to the research and policy communities and written by staff and visitors associated
with the Centre for International Economic Studies (CIES) at the Adelaide University. Its
purpose is to stimulate discussion of issues of contemporary policy relevance among noneconomists as well as economists. To that end the papers are non-technical in nature and
more widely accessible than papers published in specialist academic journals and books.
(Prior to April 1999 this was called the CIES Policy Discussion Paper series. Since then the
former CIES Seminar Paper series has been merged with this series.)
Copies of CIES Policy Discussion Papers may be downloaded from our Web site at
http://www.adelaide.edu.au/cies/ or are available by contacting the Executive Assistant,
CIES, School of Economics, Adelaide University, SA 5005 AUSTRALIA. Tel: (+61 8) 8303
5672, Fax: (+61 8) 8223 1460, Email: cies@adelaide.edu.au. Single copies are free on
request; the cost to institutions is US$5.00 overseas or A$5.50 (incl. GST) in Australia each
including postage and handling.
For a full list of CIES publications, visit our Web site at http://www.adelaide.edu.au/cies/ or
write, email or fax to the above address for our List of Publications by CIES Researchers,
1989 to 1999 plus updates.
0142
0141
0140
0139
Busse, Matthias, “Do Labour Standards Affect Comparative Advantage? Evidence
for Labour-Intensive Goods”, November 2001.
Stringer, Randy and Glyn Wittwer, “Grapes, Wine and Water: Modelling Water
Policy Reforms in Australia”, November 2001.
Damania, Richard , Randy Stringer, K. Ullas Karanth, and Brad Stith, “The
Economics of Protecting Tiger Populations: Linking Household Behaviour to
Poaching and Prey Depletion”, November 2001.
Damania, Richard and Erwin H. Bulte, “The Economics of Captive Breeding and
Endangered Species Conservation”, October 2001.
0138
James, Jennifer S and Julian M Alston, “Taxes and Quality: A Market-Level
Analysis”, October 2001.
0137
Rajan, Ramkishen, “Adopting an appropriate exchange rate regime: fixed or
floating?”, October 2001. (Paper prepared for Malaysian Economic Outlook 2001,
organized by the Malaysian Institute for Economic Research, Kuala Lumpur,
Malaysia).
0136
Anderson, Kym, Dimarana, Betina, Francois, Joseph, Hertel, Tom, Hoekman,
Bernard, and Martin, Will, “The Cost of Rich (and Poor) Country Protection to
Developing Countries”, September 2001. (Forthcoming in Journal of African
Economies 2002.)
0135
Rajan, Ramkishen and Chung-Hua Shen, “Are Crisis-Devaluations
contractionary?”, September 2001.
0134
Shapiro, Perry and Petchey, Jeffrey “Internationally Mobile Factors of Production
and Economic Policy in an Integrated Regional Union of States”, August 2001.
0133
Rajan, Ramkishen and Graham Bird, Still the Weakest Link: the Domestic
Financial System and Post-1998 Recovery in East Asia”, July 2001. (Since
published in Development Policy Review, 19 (3), pp.355-66, 2001
0132
Rajan, Ramkishen and Bird, Graham, “Banks, Maturity Mismatches and Liquidity
Crises: a Simple Model”, July 2001.
0131
Montreevat, Sakulrat and Rajan, Ramkishen, “Financial Crisis, Bank
Restructuring and Foreign Bank Entry: an Analytic Case Study of Thailand”, June
2001.
Francois, Joseph F. “Factor Mobility, Economic Integration and the Location of
Industry”, June 2001.
0130
0129
0128
Francois, Joseph F. “Flexible Estimation and Inference Within General
Equilibrium Systems”, June 2001.
Rajan, Ramkishen S., "Revisiting the Case for a Tobin Tax Post Asian Crisis: a
Financial Safeguard or Financial Bonanza?" June 2001. (Paper prepared for
presentation at a United Nations Meeting on Resource Mobilisation for
Development, New York, June 25-26, 2001.)
0127
Rajan, Ramkishen S. and Graham Bird, "Regional Arrangements for Providing
Liquidity in a Financial Crisis: Developments in Asia", June 2001.
0126
Anderson, Kym and Shunli Yao, "China, GMOs, and World Trade in Agricultural
and Textile Products", June 2001. (Paper prepared for the Fourth Annual
Conference on Global Economic Analysis, Purdue University, West Lafayette 2729 June 2001.)
0125
Anderson, Kym, "The Globalization (and Regionalization) of Wine", June 2001.
(Paper for the National Academies Forum’s Symposium on Food and Drink in
Australia: Where Are We Today? Adelaide, 5-6 July 2001.) (Forthcoming in
Australian Agribusiness Review 2002.)
0124
Rajan, Ramkishen S., "On the Road to Recovery? International Capital Flows
and Domestic Financial Reforms in East Asia", May 2001.
0123
Chunlai, Chen, and Christopher Findlay., "Patterns of Domestic Grain Flows and
Regional Comparative Advantage in Grain Production in China", April 2001.
0122
Rajan, Ramkishen S., Rahul Sen and Reza Siregar, "Singapore and the New
Regionalism: Bilateral Economic Relations with Japan and the US", May 2001.
0121
Anderson, Kym, Glyn Wittwer and Nick Berger, "A Model of the World Wine
Market", May 2001. (Forthcoming in Economic Modelling, 2002)
0120
Barnes, Michelle, and Shiguang Ma, "Market Efficiency or not? The Behaviour of
China’s Stock Prices in Response to the Announcement of Bonus Issues," April
2001.
0119
Ma, Shiguang, and Michelle Barnes, "Are China’s Stock Markets Really Weakform Efficient?" April 2001.
0118
Stringer, Randy, "How Important are the 'Non-traditional' Economic Roles Agriculture
in Development?" April 2001.
Bird, Graham, and Ramkishen S. Rajan, "Economic Globalization: How Far and How
Much Further?" April 2001. (Since published in World Economics, 2 (3), pp.1-18,
2001.)
Damania, Richard, "Environmental Controls with Corrupt Bureaucrats," April 2001.
Whitley, John, "The Gains and Losses from Agricultural Concentration," April 2001.
Damania, Richard, and E. Barbier, "Lobbying, Trade and Renewable Resource
Harvesting," April 2001.
Anderson, Kym, " Economy-wide Dimensions of Trade Policy and Reform," April
2001. (Forthcoming in Handbook on Developing Countries and the Next Round of
WTO Negotiations, Washington DC: World Bank, 2002.)
0117
0116
0115
0114
0113