University of Washington
Geography 349
Labor Impacts of Trade

Types of Economic Influences of Trade on Labor

1. Increased trade should increase returns to relatively abundant factors, whose output finds greater demand (because products that rely heavily on those abundant factors are exported).  This would include highly skilled labor in most advanced economies, and relatively unskilled labor in less advanced economies.  In the former countries, this would exacerbate wage differentials;  in the latter, it might mitigate wage differentials.

2.     Factor price equalization.  This should be limited by international differences in the productivity of a unit of (in this case), labor – differences stemming from direct capital used in production, capital infrastructure, human capital such as literacy, education, and basic health/strength, and organization/management.  All of these differences increase the productivity of labor, and to the extent that Q/L (output per unit of labor) is higher in wealthier countries, factor price equalization would end when w₁/w₂ = Q₁/L₁ / Q₂/L₂ (when the relative wages of the two trading partners equals the relative labor productivity of the two countries).

3.     FDI should increase labor productivity, especially in less-wealthy countries, because of differences in the “imported” technology and capital – and maybe management (except to the extent that good HR mgmt is a localized practice).

Labor standards

Some propose worldwide minimum wages that approximate those in wealthy countries – which eliminates export-oriented employment in poorer countries, whose workers are at a productivity disadvantage.

However, different labor and environmental standards can affect labor productivity.  Lower standards increase short-term productivity, such as not paying workers, or long work hours without breaks, or lack of a minimum working age, …  Should we have global labor standards outside of wages and benefits (“core standards” as opposed to “cash standards” in the phrasing of Elliott 2004)?

Core standards:  “fundamental principles and rights at work” [Elliott 2004]

1.        Freedom of association and the right to collective bargaining
2.        Abolition of forced labor
3.        Elimination of child labor
4.         Non-discrimination in employment (generally focused on gender)

 Elliott discusses how each of these might affect low-wage countries’ manifestation of comparative advantage –  (1) may increase wages;  (2) and (3) might reduce labor supply;  and (4) might increase labor supply (but might increase wages)

Such standards are currently outside of most trade agreements

The labor chapter in the Chile and Singapore FTAs and CAFTA calls on parties to the agreement to enforce their own laws but does not require that those laws be consistent with international standards [Elliott 2004:6].

Elliott presents some info about how different countries have dealt with these matters – take a look at the article.

Moving toward international labor standards:

1.     Through national adoption of ILO standards:  with what enforcement mechanisms?

2.     Through multilateral agreements adopting labor standards, or through regional or bilateral agreements about or adopting labor standards.

a.     Insisting that traded items be produced in compliance with each country’s standards

b.     Insisting that each country’s standards meet basic int’l standards?

c.      With what enforcement?  the same sorts of enforcement mechanisms generated for trade disputes?

3.     Through markets –

a.     consumer action, country by country

b.     Through markets -- consumer action, company by company:  requires the international transmittal of a great deal of information (typically via certification)

4.     Through international labor coordination and action:  labor does not have to be a passive victim (see below).

5.     Through labor migration to countries with better wages and working conditions.

“NAFTA has brought the issue of continental labor cooperation to the fore of labor union strategy,… as a necessary and concrete tactic in the era of the regionalized production system” [MacDonald 2003: 173].

The NAALC (North American Agreement on Labor Cooperation)

•  “requires member countries to comply with and effectively enforce their respective labor laws [relating] to 11 core principles” [MacDonald 2003: 180].
•  If a country is found to be non-compliant with its own laws, other countries can complain and perhaps even levy countervailing duties on traded goods originating in the offending country.
• But is this a “’resource intensive dead end”’ [181]?

International labor cooperation:  "Workers of the world unite" -- but how?

NAFTA’s “resultant job and wage losses and further erosion of bargaining power have convinced many Canadian and American unionists of the need to cooperate with Mexican unions to raise wages and standards” [185].

·        Unions can attempt to organize workers across the countries in which a particular company (e.g., General Motors) operates.

·        Unions can attempt to organize workers in the same sector (e.g., the automobile sector) in each country.

·        Unions can share information about employers’ tactics and operations in different countries.

·        Unions can bring worker pressure in one country to bear on its employer, based on the employer’s actions in another country.

Reasons for international labor cooperation:

·        By reducing the importance of work conditions as a basis for corporate location decisions, other factors (such as infrastructure, logistics of moving inputs or products, tax and investment regulation) come to the fore – not the factors that influence households’ ability to survive. 

“’the best way to defend jobs in the United States is to work together to elevate the level of salaries and workplace and environmental conditions in Mexico’” [185].

·        Allowing labor to be as international as capital.

Barriers to international labor cooperation [ask]:

·        Sense that the issues are separate

·        Sense that the major goal is to maintain current, national jobs and wages, by focusing efforts nationally and opposing imports (which employ workers elsewhere)

·        Linguistic and cultural barriers

·        Institutional structures – who elects the union leadership? 

Note MacDonald’s description [2003: 188] of the Coalition for Justice in the Maquiladoras, under the auspices of the AFL-CIO, but with somewhat independent authority to act on behalf of maquiladora workers and communities.

·        Institutional structures:  unions may have very different constituencies in different countries (the state;  highly skilled workers;  unskilled workers…]

Economist article focuses on labor migration

·        Bottom line:  labor resources are mobile, but do often take on wage/cost characteristics approximating those of the destination country – unless the migration flow is so large as to change the overall factor mix of the destination country.

·        Influences on migration:

o   Motivation:  levels of un- and under-employment;  focused political persecution

o   Legal restrictions (usually by destination countries);  and their enforcement

o   Degree of difficulty (transport costs, information, set-up)

·        Impacts of migration:

o   Increased supply of labor (note that Y = λ K^αL^β )-- national output is a function of technology, capital, and labor.

o   (Potentially, reduced wages, if the demand for the relevant types of labor does not increase)

§  inflow of refugees to Miami from the Cuban port of Mariel in 1980. Within the space of a few months, 125,000 people had arrived, increasing Miami’s labour force by 7%. Yet the study concluded that wages and employment among the city’s natives, including the unskilled, were virtually unaffected.

§  In his 1997 book Trade and Income Distribution, William Cline reviews the literature on globalisation and wages. In general, Mr Cline’s estimates tend to the pessimistic end of the range. Nonetheless he finds that of all the forces acting to lower unskilled wages relative to skilled, immigration is the weakest. According to his estimates, immigration would by itself account for a fall of two percentage points in the ratio of unskilled to skilled wages in America between 1973 and 1993. Technological change, acting to reduce the demand for unskilled labour, and a category called “unidentified factors” pushing the same way would each account for a much greater fall of nearly 30 percentage points.

o   (Potentially), increased supply of skills

o   Increased household demand (note that Y = C + I + G + X –M)

 References:

The Economist.  Workers of the world.

Kimberly Ann Elliott (2004).  Labor Standards, Development, and CAFTA.  Institute for International Economics Policy Brief 04-2.

Gèrald Larose (2000).  Globalization and the social dimension.  Pp. 159-165 in Free Trade: Risks and Rewards, ed. by L. Ian MacDonald.  Montreal: McGill-Queen’s University Press.

Ian Thomas MacDonald (2003).  NAFTA and the emergence of continental labor cooperation.  The American Review of Canadian Studies (Summer): 173-196.