Labor Cost Incentives for Capital Mobility in the European Community

Abstract

Abstract On December 31, 1992, the twelve economies making up the European Community (EC) took a major step toward becoming a single market with the initiation of the internal market program allowing for the free movement of goods, people, and money across borders. One major hypothesized effect is that capital will flee from high-labor-cost countries to those with low labor costs, or that “social dumping” will occur: a lowering of labor standards and social protection in the wealthier countries in response to competition from countries with substantially lower labor standards and costs. One aspect of this issue involves labor protection and social policies, which are expected to be addressed to a greater or lesser extent by the Social Charter and its supporters’ goal of long-term upward harmonization of social policies. How ever, even if standards are equalized, there remains the issue of labor costs. Labor costs can be a key component of competitive strategy, and it seems doubtful that harmonization policies will be able to equalize the currently large differences in man unfaltering labor costs across the EC countries. Despite the considerable attention given to harmonization of labor standards, relatively little attention has been paid to the question of the levels of labor costs within the EC.