On Labour Standards and Free Trade

Michiel Kok, Richard Nahuis and Albert de Vaal

No 331082, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: We investigate the effectiveness and efficiency of alternative measures to increase standards in low-income countries in a two-country framework where (a) trade and standards in low-income countries are negatively related, and (b) free trade is no longer optimal for the high-income country due to a negative psychological externality that low standards in low-income countries exert. We find that any uncoordinated, unilateral action by the high-income country to decrease the psychological externality is dominated by coordinated action; both with respect to the psychological externality as with respect to the welfare consequences for both countries. Since any increase in the standard in the low-income country decreases their welfare, co-ordination is not always a feasible solution. Only when incorporated in the framework of the WTO, co-ordination can be made incentive compatible and gives rise to a situation where free trade again works to the advantage of both countries.

Keywords: Labor and Human Capital; International Relations/Trade (search for similar items in EconPapers)
Pages: 35
Date: 2003
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Working Paper: On labour standards and free trade (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:331082

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