Labour Standards and International Competitiveness

Citation

Kao, C. (2000), "Labour Standards and International Competitiveness", International Journal of Manpower, Vol. 21 No. 3/4, pp. 322-330. https://doi.org/10.1108/ijm.2000.21.3_4.322.3

One question of interest to many researchers in the area of labour studies and to policy makers at different levels is whether labour standards have an impact on national competitiveness. This book was written under the request of the President of the Organization for Economic Co‐operation and Development (OECD) Development Centre, Mr Jean Bonvin, precisely to answer this question. The original draft was written in French, and Mr Michel Forand has translated it into English. Since this book is not intended to serve as a textbook, it is relatively concise in its content. Excluding the appendices and bibliography, there are only 66 pages, composed of four chapters and a two‐page Introduction. In the Introduction, the purpose of the book is stated and the structure of the book is introduced. Chapter 1 provides some background regarding the political issues of labour standards. Chapters 2 and 3 contain the theoretical analysis and empirical studies, respectively. The last chapter, “Conclusion”, is very short, at only three pages.

Labour organizations and governments of the developed countries are the key promoters of labour standards. The developing countries, on the other hand, generally want to remain free to determine for themselves the standards that best meet their need in the progress of development. In view of these two opposing views, Chapter 1 introduces the origin of labour standards, the role of labour unions, the position of the US government, the social policy of the European Union, and the task of International Labour Organization (ILO). Humanitarian concern is the primary driving force to establish minimum labour standards. The perceivably unfair competitive advantage enjoyed by the developing countries in terms of wages is another factor for establishing labour standards. Labour standards with respect to human rights and social justice are mainly attributed to labour unions in different countries. At the international level this role is played by the ILO. As the authors note, ratifying ILO’s conventions and recommendations is rather simple: the critical thing is whether the ratified conventions are supported by enforcement legislation in each country. How to set minimum standards for all countries and leave the other standards to the discretion of each country based on individual levels of economic development is a related issue.

In Chapter 2, whether there are objective reasons for adopting labour standards is discussed from an economic perspective. Due to the minimum wage level required to ensure the subsistence of individual workers, the true labour supply curve becomes scissor‐shaped, intersecting the labour demand curve at two points. One is the usual equilibrium point and the other is another equilibrium point characterized by unreasonable work contracts and excessive demands. The standards set a lower margin for labour input costs. If the lower limit is below the equilibrium point, then the employment will not be reduced. On the contrary, if the lower limit is above the equilibrium point, then workers who would receive a wage lower than the limit do not have a job that pays them better. Rather, they find themselves unemployed because the supply of labour exceeds the demand. The value of labour standards and the cost to workers when governments adopt new legislation are discussed via some economic analysis. To minimize the costs associated with disparities in preferences across any particular country, the authors agree that decentralization is an effective means.

A major concern of the developed countries is whether lack of the standards in developing countries gives them an unfair competitive advantage. From an economic perspective, this book shows that productivity is the primary influence in determining compensation. In addition, compensation and productivity are inextricably linked and a country where wages and productivity are low has no competitive advantage. Strong labour standards are not necessarily a condition for improving wages in developing countries; rather, wages rise at the same pace as productivity. Some historical data from South Korea, Hong Kong, Singapore and Taiwan regarding the real wages and unemployment rate are collected for illustration. The authors conclude that the labour standards result in a reduction in the number of hours worked but not in the number of jobs. They may result in wage reductions, but they do not alter the competitiveness of businesses. When labour standards result in a change in wages, this comes about through the mechanism of changes in labour productivity.

The third chapter reports the findings of an empirical study. The authors examined whether implementing labour standards is disadvantaged in any way. As noted by the authors, reliable indicators for the variables concerned are missing. Based on the data available, the stringency of the standards is represented by the United Nations’ human development index. Exports, investment, and competitiveness are represented by customs returns, foreign direct investment (FDI) flows, and the unit labour cost, respectively. Countries with a declining, stable, or growing share of exports are detected via a regression analysis with time used as the independent variable. The results do not support the view that high‐standards countries are threatened by their low‐standards counterparts. A similar approach concludes that labour standards do not lead to a systematic and significant flight of direct investment. While one might expect to see a lowering of the unit labour costs in low‐standards countries, that is not the case. The authors also find that labour standards in themselves do not have a significant impact on the competitiveness of national economies. Stringent labour standards lead to an increase in compensation which forces employers to raise their productivity.

Chapter 4, the book’s Conclusion, highlights the main results derived in the previous chapters. Appendix A analyses the worker’s behaviour. It is shown that following the adoption of new labour standards, the individual will maximize his or her utility by reducing the consumption of ordinary goods, ordinary services, and leisure. Furthermore, it is natural for a country with higher‐than‐average incomes to adopt stringent labour standards. Appendix B takes the viewpoint of the firm and demonstrates that as long as compensation is a function of labour productivity, low‐wage firms do not enjoy any competitive advantage relative to their high‐wage counterparts. Another part of this appendix shows that in order for Samulson’s factor‐price equalization theorem to be valid, production functions must be absolutely identical in any industry and in any country. Appendix C lists the regression coefficients of the empirical study of Chapter 3.

One major contribution of this book lies on the empirical study of Chapter 3, where the authors use statistical analysis to verify the relationship between labour standards and exports, foreign investment, productivity, etc. Despite the effort devoted, the conclusions of this part should not be accepted without reservation. Many scholars will not agree with the use of human development index in order to represent the stringency of labour standards. The same concern occurs in using unit labour cost as a measure of competitiveness. In examining the relationship between labour standards and several variables, the authors categorize 20 countries with the highest human development index as high‐standards countries and the remainder (around 145 countries) as low‐standards countries. Statistical results from these two groups are compared to draw conclusions. According to the authors, the formation of these two groups is somewhat arbitrary. It is very probable that different ways of forming the two groups will lead to different conclusions. Consequently, the results derived from the regression analysis are not suitable for drawing conclusions in a rigorous sense. However, they do shed some light on the relationships discovered.

To summarize, this book gives some insight regarding the labour standards and international competitiveness. The theoretical part is attractive while the empirical part is weak. The overall conclusion drawn by the authors that only a small number of core standards should be enforced and that the rest can be left to the discretion of the economic players, i.e., governments, employers, and labour unions, is in agreement with the recommendations of other authors in the field.