International Labour Standards and North–South Competition

This paper models the economic aspects of labour standards (LS) in an oligopolistic framework of three countries, incorporating labour–management negotiations in the North and monopsonic labour markets in Southern countries. Contrary to the literature, a higher LS not only incurs a higher cost, but also benefits workers and induces them to work harder. Because of these links, Northern intervention, via import taxes or minimum LS regulation, may often have perverse effects on Southern countries. Specifically, imposing an unconditional tariff against a certain Southern country to force up its LS does not work. Further, the unconditional tariff would shift production to another country. These shed light on why developing countries oppose including LS in WTO negotiations. However, a LS‐contingent tariff, or a minimum LS regulation is effective in raising LS in Southern countries, but the utility of the Northern labour union may fall. Incorporating altruism and humanitarian concerns mitigates the effects of unconditional tariff policies. Finally, as the empirical evidence shows, we demonstrate that multinational enterprises choose to locate in those developing countries whose LS is relatively higher.