Are Global Labor Standards Good for Business?
STANFORD GRADUATE SCHOOL OF BUSINESS—The following release describes research by Professor Robert J. Flanagan of the Stanford Graduate School of Business that will be presented at the International Labor Standards Conference at the Stanford Law School on May 20. The broadest survey of its kind, this study dispels the idea that there is a "race to the bottom" among countries striving to have the lowest labor standards or that having the lowest standards provides competitive advantages in the global economy.
Economists, politicians, and activists have long debated whether countries that do not adopt international labor standards gain an advantage in trade and investment at the expense of those who do. This issue is at the heart of the protests at recent meetings of the World Trade Organization (WTO).
The debaters have strong opinions but very little evidence to support their point of view, says Robert J. Flanagan, the Konosuke Matsushita Professor of International Labor Economics and Policy Analysis at the Stanford Graduate School of Business. Flanagan recently set out to test the arguments by conducting a comparative study of about 100 countries at various stages of development and at various times between 1980 and 1999. He looked at how these nations adopted standards developed by the International Labor Organization (ILO) such as abolishing forced labor, sexual discrimination, or granting workers the right to bargain collectively.
One view, held by many politicians in industrialized countries, is that nations face competitive pressures to have the lowest labor standards possible in order to increase their share of exports and investment—known as "the race to the bottom." This view assumes that when a national government ratifies one or more ILO standards, labor costs rise. Advocates of free trade argue that labor costs and conditions are determined by other factors, and that standards created by the ILO, a United Nations agency, only reflect the state of working conditions that already exist in a country.
Some advocates of the race-to-the-bottom position have argued that countries that refuse to adopt the standards should be denied the lower tariffs established in WTO negotiations. Many politicians in developing countries oppose linking trade negotiations to labor standards, Flanagan says, because they see lower labor costs as their country's comparative advantage.
In reviewing existing research, Flanagan found no studies of whether ratification of ILO labor standards actually improved labor conditions in a country, so he compared labor conditions in the selected countries to those in the same nations five years earlier. "I did not find that earlier ratification influences later labor conditions," he said. "On the other hand, when I reversed the process, I did find that labor conditions, say in 1975, influenced the number of ratifications a country had made five years later. By time-ordering the data, I've straightened out the causality."
Flanagan also tried to determine whether ratification of ILO standards accounted for differences in countries' exports, wages, and foreign investment inflows. To do so, he said, "one must first take account of the fact that these variables are determined by many factors that have nothing to do with labor standards. Once you hold these effects constant, international labor standards do not influence labor costs, exports, and foreign direct investment."
Flanagan's research showed that ratification of labor standards is purely symbolic. Countries only ratify standards their domestic policy already has attained. Economic development and an open trade policy—not ratifying ILO standards—improve workers' labor conditions and wages. In other words, a country's domestic policies can raise labor productivity, which, in turn, creates the wage differences among countries, Flanagan found.
Take, for instance, the lowest and highest wage countries—Kenya and the United States. "In my data, the wage in the U.S. was 183 times higher than the wage in Kenya. Kenya has ratified more labor standards than the U.S., but the productivity difference between the countries is very similar to the wage difference, which implies that the best way for a country to raise wages is to improve productivity," he said. Flanagan also found that countries suffer negligible penalties for failing to ratify ILO conventions, not surprising since there are only weak mechanisms for enforcing the standards. The United States, for example, is one of four countries—along with China, Armenia, and Myanmar—that ratified only two of the eight conventions devoted to fundamental human rights. This is despite the existence of strong domestic laws in that category in the United States.
When you look at the list of countries that have ratified all the standards, about a third of those studied, Flanagan said, "you realize there has to be something fishy in the race-to-the-bottom argument, because these are often fairly undeveloped countries with poor labor conditions," such as Botswana, Senegal, and the Central African Republic.
Based on his research, Flanagan said, it would be best if the WTO negotiations were conducted as they always have been: focused primarily on trade policy between countries, while labor standards issues are left to the ILO or nongovernmental organizations.