Chapter 4 LABOUR STANDARDS AND ECONOMIC INTEGRATION A, INTRODUCTION AND MAIN FINDINGS the establishment of a “social clause” in the GATT. Then there is thc vicw that labour standards are a poten- tial determinant of economic efficiency [Sengenberger Over the last decade, the process of creating and (1991); Castro et al. (‘I 992j1, Without international stand- enlarging regional trading areas (RTAs j has gathered ards, firms will compete by offering poor working condi- momentum. The EC Single Market, European Free Trade tions. The imposition of a floor to wages and employ- Agreement (EFTA) and North America Free Trade ment protection legislation, it is argued, will create a Agreement (NAFTA) are important examples of RTAs in stable labour relations framework conducive to improved the OECD area. The membership of these RTAs includes human capital and higher real incomes, and thereby boost countries with different levels of economic development world trade. Thus, the establishment of certain labour and with different labour standards. The issue arises as to standards would be justified un long-term efficiency whether some degree of harmonization of labour stand- grounds. A third group argues that, on the contrary, ards is called for, so as to prevent trade liberalisation exogenously imposed labour standards may produce det- stemming from economic integration from eroding work- iimental output and trade effects [Fields (1990)l. Accord- ing conditions, Governments and firms may indeed be ing to this vicw, working conditions should improve tcinptcd to put pressure on working conditions and social hand in hand with economic development and so policy- protection in an effort to improve competitiveness in makers should focus on outcomes rather than on the world markets, generating what has been called “social regulations and institutional arrangements governing dumping”. This chapter can serve as an introduction to such conditions. what is a complex and politically sensitive analytical The aim of this chapter is i) to discuss the determi- area, one in which empirical work is only beginning. nants of labour standards and review existing practices in In this chapter, labour standards are defined as the RTAs involving OECD countries; and ii) to investigate rules and regulations that govern working conditions the possible linkages between labour standards and trade. (working tiinc, cinployment stability, workers’ represen- These linkages can go in both directions: on thc onc tation rights, minimum wages, health and safety in the hand, iiitcrnational differences in labour standards may workplace, etc.). These rules and regulations can be shape trade and foreign direct investrrml flows; on the cstablished through legislation, collective agreements or other, trade and foreign direct investmcnt can have reper- both. It is important to distinguish labour standards from cussions 011 both labour standards and actual working actual working conditions - the latter are influenced by conditions. These linkages can be endogenous, in the many factors, including labour standards, productive effi- sense that they are a spontaneous resull or market forces. ciency, and the degree of exposure to international trade. However, therc may also be discrete changes in labour The links between labour standards and trade are standards, as governments agree to harmonize legislation controversial. Not much evidence exists and it is difficult before the forces of economic integration manifest to design an appropriate framework. More generally, themselves. there are various arguments for and against the establish- The main findings of the chapter are as follows. ment of social clauses in international trade agreements. Firs& some convergence towards fewer government reg- To begin with, there is concern that low labour standards ulations has been recorded in the countries under review may be “unfair” to the extent that they distort interna- (except perhaps in some Southern Europe.an countries). tional competition [Edgren (1979); Charnovitz (1 987); Thus, enterprises enjoy increased possibilities of stretch- Walwei and Werner (1 993)j. The implication is that ing normal working time without having 10 pay ovcrtimc, countries that respect labour standards (presumably The scope for flexible contract arrangements has been dcveloped countries) should make trade liberalisation broadened, while employment protection regulations conditional upon the ralilicalion and enforcement of min- have become less stringent. The incidence of minimum imum labour standards by other countries. This has given wages has been reduced through changes in indexation rise to calls by trade unions and other pressure groups for clauses, whilc in some countries sub-minirnum wages for 137 certain categories of workers have been created or pean countries, labour standards have been seen as an extended. More generally, labour standards are increas- important dimension of social policies; as a result, the ingly determined by collective bargaining or through authorities in these countries have taken direct action to individual contracts and less by administrative regula- improve them. Second, market forces are a key determi- tions. Finally, governments have made some effort to nant. Historically, labour standards have gone hand in curb the trend rise in social protection expenditures. hand with economic development: working conditions Second, despite these pressures on labour standards, improve alongside of real living standards, and these there is no compelling evidence that ‘‘social dumping’ ’ improvements might then be codified in the form of has occurred so far in OECD countries. It is unclear labour standards. This is not surprising since workers are whether increased flexibility is the result of economic in a much stronger bargaining position when the econ- integration per se, or whether other factors have played omy expands. The income elasticity of demand for an equally or more important role (technological change, labour standards may also be greater than unity, espe- high unemployment). More importantly, the chapter cially at low levels of income. On the other hand, eco- shows that there is an association between wages and nomic slack can be expected to be associated with a other working conditions on the one hand, and the level pause in the improvement of labour stmdards. Third, of economic development on the other. technological advances and related changes in manage- ment and trade union practices are likely to shape the Third, the above results suggest that actual working nature of labour standards. For example, the spread of the conditions are largely independent from labour standards, new information technologies has facilitated the develop- i. e. the determination mechanism (whether by regulations ment of more flexible forms of employment contracts or through market forces). (teleworking, etc.). Moreover, the introduction of new Fourth, pressures for lower labour standards could technologies at the workplace often necessitates consulta- have been stronger if impediments to labour mobility tion and co-operation between employers and employees, within regional trading areas had been suppressed faster: leading to major changes in workjng conditions. were that the case, investors would have exploited differ- ences in labour standards and social protection, and thus initiated a process of levelling-down. In addition, the 1. ILO international labour standards unification of exchange rates, such as planned in the Maastricht Treaty, could encourage resort to “social devaluations”. The question of whether labour standards At present, TLO labour standards embrace numerous should be harmonized will no doubt be raised again as aspects of labour markets, ranging from minimum wages economic integration deepens. This also means that more and equal pay to health and safety regulations. These empirical work is called for in order to sort out the standards can be classified into six main categories. various hypotheses and causal relationships at work. The chapter begins with a review of the main i) Respect for fundamental human rights types of labour standards, taking the ILO International Conventions as a starting point (Section B). It then exam- Convention 87 of 1948 recognises the rights of ines in depth a selected subset of labour standards that workers and employers to create and join trade unions or are likely to play an important roIe in the process of other types of representative organisations. According to economic integration, and for which quantitative data are other conventions, these rights should apply to public readily available (Section C). This subset of labour stand- civil servants and private sector workers alike. Conven- ards will be compared across countries belonging to the tions 29 of 1930 and 105 of 1957 call for the abolition of three trading areas, so as to assess whether there has been any form of forced or compulsory labour. However, they some convergence during the period of rapid integration. specify the conditions under which some forms of com- The relationships between labour standards, trade and pulsory labour “in the public interest” can be main- foreign direct investment flows are then investigated tained. Finally, various other conventions affirm the prin- (Section D). Finally, research and policy issues emerging ciples of equal pay and working conditions. In particular, from the analysis are discussed (Section E). these stipulate that race and sex should not motivate