The two‐way interaction between globalization and labour market policies

Abstract

Labour market and social policies both affect and are affected by the process of trade liberalization and globalization. This two‐way interaction and the feedback effects are the focus of this paper. The analysis is mainly conceptual—but examples are illustrated throughout, based mainly in the context of labour markets in North America, Latin America and the Caribbean basin. Attention is paid to outlining the mechanisms whereby globalization and trade liberalization affect labour market and social policy initiatives, and the extent to which these pressures will lead to a harmonization of legislative and policy initiatives, and if that harmonization will necessarily be downward to the lowest common denominator. The paper concludes that: (1) the pressures will lead towards policy harmonization; (2) the harmonization generally will be downwards; (3) such harmonization is not always negative as generally perceived; (4) efficient regulatory and social policy initiatives will survive and indeed expand, with the “rent‐protecting” ones under most pressure to dissipate; and (5) pure distributional or equity‐oriented initiatives that have no positive feedback effect on efficiency, unfortunately, will also be under jeopardy to dissipate, and this is a serious policy concern. Alternatives for addressing this concern are discussed, as are their associated problems.

Notes

* Andrew Downes, Sir Arthur Lewis Institute of Social and Economic Studies, University of the West Indies, Cave Hill Campus, Barbados. Rafael Gomez (to whom correspondence should be addressed), Interdisciplinary Institute of Management, London School of Economics, Houghton Street, London WC2A 2AE, UK, and Centre for Industrial Relations and the Centre for International Studies at the University of Toronto. Morley Gunderson, University of Toronto and Centre for Industrial Relations and the Department of Economics.

For a discussion of the various dimensions of the deepening and widening of economic integration, see Castro‐Rea (1996), Gunderson (2001) and Gomez & Gunderson (2002).

The issue of underinvestment in training in Latin America is emphasized in Berry (2001) and Berry & Méndez (1998). Possible market failures that can lead to underinvestment in training are discussed in Gunderson & Riddell (2001b).

Gunderson & Riddell (2001a). Cortázar (2001) outlined negative effects of unemployment insurance (UI) in terms of increasing unemployment and fraud through people working in the underground economy while collecting UI. To alleviate these problems, he recommended mandatory UI savings accounts that the individual worker can draw on if unemployed. These would also replace the traditional high severance payments that are prominent in Latin America.

In spite of the reasons why minimum wages may be an exceedingly blunt instrument for reducing poverty, Morley (1995) and Lustig & McLeod (1997) found that minimum wage increases have been associated with reductions in poverty in Latin America.

Evidence of multinationals providing better pay and working conditions than domestic producers in the host countries is provided in Lim (1976), OECD (1999) and Jenkins (1990), although Forrest (1993) found that multinationals in Guadalajara, Mexico, did not do so.

Discussions of such migration are provided in Myrdal (1957) and Gunderson (1996).

For a discussion of the lack of enforcement in Mexico, see Areous (1994).

This legislative‐induced shift to the informal sector is discussed in Harrison & Leamer (1997), Lee (1997), Maskus (1997) and Portes (1990). The growth of non‐standard employment in the USA, Canada and Mexico since the mid‐1980s is documented in a recent report of the North American Agreement on Labour Co‐operation (NAALC, 1996) and discussed in Roberts et al. (1996).

With respect to the growth dimension, Rama (1995) found that labour regulations such as minimum wages, severance pay or mandatory benefits tended not to have a negative effect on output growth, based on data from 30 Latin American countries.

Evidence that foreign direct investment is not attracted to countries of low labour standards is discussed in Stern (1999, p. 21).

This is analogous to the idea that the main rationale for NAFTA was not so much to get the direct benefits from free trade, but rather to “lock in” the market‐oriented reforms that were occurring in Mexico (Prestowitz et al., 1991).

See Banting et al. (1997) and Banting & Simeon (1997).

This positive effect of growth on social programmes and labour standards is emphasized in Cassella (1996), Fields (1995), Fields & Wan (1989), Freeman (1994) and Stern (1999).

Berry (1997, 2001), Cline (1997), Richardson (1995) and Wood (1996). Feenstra & Hanson (1997) found that foreign direct investment by the USA in Mexico increased inequality in both countries by increasing the demand for skilled labour in Mexico and reducing the demand for unskilled labour in the USA.

Labour standards in trade agreements are discussed in Brown et al. (1996), Charnovitz (1992), Erickson & Mitchell (1996), Fields (1995), Gunderson (1999) and Maskus (1997).

Aparicio‐Valdez (1995) discussed such accords in Latin America and the Caribbean.

Additional information

Notes on contributors

Rafael Gomez *

* Andrew Downes, Sir Arthur Lewis Institute of Social and Economic Studies, University of the West Indies, Cave Hill Campus, Barbados. Rafael Gomez (to whom correspondence should be addressed), Interdisciplinary Institute of Management, London School of Economics, Houghton Street, London WC2A 2AE, UK, and Centre for Industrial Relations and the Centre for International Studies at the University of Toronto. Morley Gunderson, University of Toronto and Centre for Industrial Relations and the Department of Economics.