Does globalization weaken labor unions in developing countries?

Abstract

For a developing economy with a given urban wage rate, globalization in capital markets strengthens labor unions. This result hinges on the fixed urban wage rate, which leads to a constant capital–labor ratio in the urban sector. Globalization via capital inflows not only enhances the employment effect of unionization but also reduces the rent-shifting related loss in production inefficiency to domestic capital, lending a support to labor unions for developing economies. This result is contrary to the common belief that labor unions tend to be weakened during the globalization process observed after 1980s in many developed economies.

Keywords:

• unionization
• globalization
• capital inflow

JEL Classifications:

• F20
• J50

Acknowledgements

We are indebted to two anonymous referees for their insightful comments. The usual disclaimer applies.

Notes

1. The determinants of unionization can be found in Katz (1993) and Bender (1997). A reverse view is that aggressive labor unions can be an obstacle to the integration of capital markets in industrialized countries (Aloi, Leite-Monteiro, and Loyd-Braga 2009). Kemp and Shimomura (1985) nevertheless show that the emergence of labor unions can actually attract, rather than drive out, foreign capital. Thus, the causality between globalization and unionization should be an interesting topic for investigation.

2. This three-factor model on production is originated from Jones (1971). See Chakrabarti (2009), Gilbert and Oladi (2009), Beladi and Marjit (1996), Beladi, Chakrabarti, and Marjit (2010), Beladi and Yabuuchi (2010) and Hadjiyiannis, Hatzipanayotou, and Michael (2009) for related studies on capital specificity in general equilibrium analyses.

3. The specific-factor Harris and Todaro (1970) model was extended by Corden and Findlay (1975) and Neary (1981) to consider intersectoral mobility of capital. Other studies can be found, for example, in Parai and Beladi (1997), and Hatzipanayotou and Michael (2001).

4. The urban unemployment rate is ρ = L_u /(L_X + L_u ), which can be written as: ρ = μ/(1 + μ), where μ (= L_u /L_X ) is the urban unemployment ratio. There is a strictly positive relation between μ and ρ because dρ/dμ = 1/(1 + μ)² > 0.

5. We acknowledge a referee for pointing out this interpretation.

6. Under homothetic preferences, a representative consumer exists and its demand can represent aggregate demand of the economy.

7. This idea size of bargaining power is from social point of view, rather than from the union's perspective. However, under the latter case, the optimal value of α would be unity because all of the capital income is shifted to urban workers. We thank for a referee to mention this implication.

8. We use dX_K /dK = X_KL (dL_X /dK) + X_KK  = (X_KLL_X  + X_KKK)/K = 0 to obtain this result, since the production function of good X is homogenous of degree one in labor and capital.

9. Differentiating U _α with respect to α gives: U _αα =−pK_dX_K −αpK_dX_KL (dL_X /dα) + w_XL_X (dβ/dα) + βw_X (dL_X /dα), where dβ/dα =−{ϵ_LL/[(1 + μ)L_X  + ϵ_LL_Y ]²}× (dL_Y /dα) > 0.