Trade, Labor Standards and Income Distribution: A Reappraisal

Abstract

This article is a theoretical analysis on the consequences of international diversity in labor standards on North-South trade and income distribution. So far, most economic research on the links between trade and labor standards has focused on the effect of low standards in developing countries on national welfare in the North. This literature seems to reach an unambiguous conclusion: an open trade regime remains the North's best option and any attempt to harmonize labor standards across countries would be misguided.

This paper broadens the analysis in three ways. First, the article places the trade and labor standards within the context of the now large literature on the effects of North-South integration on income distribution. To do so, the analysis relies on a version of the Heckscher-Ohlin model with skilled and unskilled labor as the two factors of production.

Second, this article extends the Heckscher-Ohlin beyond the conventional two-country case in order to take into account the usually omitted South-South dimension of the trade and labor standards issue. A three-country model (with 2 Souths and 1 North), which allows for the possibility of trade diversion, questions the conventional wisdom that neither the ability nor the benefits of adopting domestic standards "depends in any important way on whether other countries do the same" (Krugman, 1997, p.115).

Finally, while most of the literature treats labor standards as a generic concept, this paper analyses the particular cases of child labor standards and union rights. This permits to look at how different labor standards interact. The present paper shows that when considered individually both child labor standards and union rights have a similar effect on international trade. These effects, however, are not necessarily cumulative.

Keywords: labor standards, international trade, income distribution, economic development