Wage Differentials, Monopsony Labor Markets, and the Trade-Labor Standards Debate

Abstract

This paper uses a simple theoretical model confined to reasonable parameters to investigate the implications of improved labor rights and benefits (i.e., standards) in the export sectors of the developing nations (the South). Given the strong opposition to a broad trade-labor linkage, it is likely that any externally imposed improved labor standards will be restricted to trade-impacted goods. That being the case, the only standards that are likely to significantly impact trade are improved union rights and living wage campaigns. The effects of improving these labor standards vary depending on whether initially there is a wage differential that the standard reduces or whether the standard creates a new differential. The degree to which an existing differential is due to monopsonistic labor markets is also important. It is found that if a standard improves worker welfare in one region, that it reduces worker welfare in the other region; thus improving labor standards effectively pits workers in the South against workers in the North. An exception to this is possible under certain monopsony situations. In what is the most realistic case, implementation of the labor standard improves the welfare of Northern workers and lowers the welfare of Southern workers. If the objective is to improve Northern workers’ welfare, a Northern tariff is a more efficient policy tool than is a higher Southern labor standard.