Trade and Labour Standards: Will There Be a Race to the Bottom?
The objective of this paper is to investigate whether international rivalry will lead to a “race-to-the-bottom” (RTB) in labour standards. We derive the equilibrium levels of labour standards in an environment that is most conducive to a RTB, specifically the Brander and Spencer (1985) model of strategic trade in which each government has an incentive to lower the cost of a domestic firm. Our analysis suggests that strategic trade considerations do not lead to a RTB in labour standards. To the contrary, equilibrium labour standards are higher than those in the absence of government intervention. In the case where governments are free to choose the rate of an export subsidy, labour standards are inefficiently high. Binding global trade rules that reduce the subsidy rate would move the equilibrium labour standards closer to their efficient level, and a prohibition of the subsidy would eliminate the efficiency loss in labour markets.