A race to the bottom in labor standards? An empirical investigation☆

a r t i c l e i n f o One of the concerns over globalization is that as nations compete for investment, they relax labor standards to attract firms. Using spatial estimation on panel data for 135 countries over 17 years, we find that the labor standards in one country are positively correlated with those elsewhere (i.e. a cut in labor standards in other countries reduces labor standards in the country in question). This interdependence is more evident in labor practices (i.e. enforcement) than in labor laws. Further, while we find evidence of competition in both developed and developing countries, it is strongest among developing countries with weak standards. While many concerns have been expressed over the impact of increasing globalization, many of them center on the possibility of a race to the bottom in which governments seek to attract foreign direct investment (FDI) by removing policies that, although potentially socially desirable, are viewed as unattractive to firms. This worry has been expressed in the arenas of taxation, environmental regulation, and labor standards, among others. While there is a growing literature estimating the extent of the such competition in international taxation and environmental policies, there is little work on the potential strategic interactions in labor standards. To our knowledge, the only study besides the current one that does so is Olney (2010), who finds evidence of a race to the bottom in employment protection among OECD countries. The current study complements this by using panel data on 135 developed and developing countries from 1985 to 2002 to estimate whether the Mosley (2011) and Mosley and Uno (2007) measures of labor rights in one country depend on those elsewhere. These measures capture various factors regarding the ability of workers to bargain collectively. For the full sample, we find a significant and positive spatial lag, which is consistent with strategic complements and a necessary condition for there to be a race to the bottom. In particular , this seems to be driven primarily by competition in labor practices rather than labor laws, suggesting that competition is driven less by a failure to institute regulations than by an unwillingness to enforce them. Since there is a noticeable downward trend in the average of both of these measures over the sample period, we take this as evidence of a race to the bottom for the average country. Although there has been less …