Asymmetric labor markets and the location of firms: Are multinationals attracted to weak labor standards?

Alireza Naghavi

No 200323, Working Papers from School of Economics, University College Dublin

Abstract: This paper studies the strategic behavior of multinationals towards weak labor standards in developing countries (South). Without a marginal cost pricing policy, abundant labor in the South gives firms the power to set wages through their choice of output. A strategic reduction in output offsets or weakens direct gains from lower wages. In an open economy, it also increases output and profits of a competitor that operates in a perfect labor market. These effects lower profitability of locating in the South casting doubts on traditional beliefs that multinationals are always attracted to lower wages. Adopting standards enhances Southern welfare unambiguously.

Keywords: Labor standards; Labor market imperfection; Oligopsony; Location of firms; Wages; Strategic behavior; Multinationals; Welfare; International business enterprises--Location; Labor laws and legislation--Developing countries; Industrial location--Effect of labor market on (search for similar items in EconPapers)
JEL-codes: F12 F23 J42 J80 L13 R38 (search for similar items in EconPapers)
Date: 2003-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://hdl.handle.net/10197/1787 First version, 2003 (application/pdf)

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