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Discussion Paper No. 0142 Adelaide University Adelaide 5005 Australia Do Labour Standards Affect Comparative Advantage? Evidence for Labour-intensive Goods Matthias Busse December 2000
Discussion Paper No. 0142
Adelaide University
Adelaide 5005 Australia
Do Labour Standards Affect Comparative Advantage? Evidence for Labour-intensive
Goods
Matthias Busse
December 2000
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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
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: [email protected]
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)
138 (2) Right to Organise and Collective Bargaining Convention, 1949 (No. 98)
150
Forced Labour (3) Forced Labour Convention, 1930 (No. 29)
159
(4) Abolition of Forced Labour Convention, 1957 (No. 105)
157
Child Labour (5) Minimum Age Convention, 1973 (No. 138)
115
(6) Worst Forms of Child Labour Convention, 1999 (No. 182)
106
Discrimination (7) Equal Remuneration Convention, 1951 (No. 100)
154
(8) Discrimination (Employment and Occupation) Convention, 1958 (No. 111) 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 unskilled-
labour-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 C3 PPF2 C1 U3 PPF1 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 unskilled-
labour-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-labour-
11 See Booth (1995) for a more thorough survey on the effects of trade unions. 12 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)
-0.443*** (0.106)
LABFEM 0.355** (0.145)
CHILD -0.429** (0.203)
CIVIL -0.031*** (0.010)
UNION -0.058*** (0.017)
CONVEN 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.
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Appendix A: Low Technology and Labour-intensive Goods
Commodity SITC, Rev. 3
Textile yarn and fabric 65
Glass, glassware and pottery 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
Dependent Variable: EXLAB98
LABDENS 0.412 0.346 0.443 0.512 0.576 0.415EDU -0.372 -0.473 -0.384LABFEM 0.238 CHILD -0.205CIVIL -0.281UNION -0.343CONVEN 0.083
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