Child Labor Standards and Harmonization

Brown, Deardorff and Stern (1996) apply two types of normative theoretical approaches to the question of whether labor standards should be harmonized across countries or whether each country should set its own labor standards. The first is a partial equilib-rium analysis of standards, the second a general equilibequilib-rium model of trade with exoge-nous standards. In their partial equilibrium analysis the authors argue that the imposition of standards must be related to the existence of an externality. Concerning child labor, the authors therefore assume that the existence of child labor reduces social welfare. By imposing additional costs on domestic firms, a standard will raise social welfare by cor-recting an externality of some sort causing costs incurred by a society otherwise not being borne by the firm. Assuming that the country is too small to affect world prices, domestic policies in the form of labor standards that internalise the externality are wel-fare improving from the point of view of both the individual country and the world as a whole. Since standards will vary across countries according to the degree of externality, the domestic standards will depend on each society’s valuation of the costs resulting from labor standards. Thus world welfare would be maximized if each country adopts its own optimal standards in accordance with its own needs and perception of costs.

Harmonizing labor standards across countries, i.e. setting international labor standards, would produce an inefficient outcome. Requiring that all countries impose the same standards will entail that some countries impose higher or lower labor standards than the corresponding social costs. Hence, the standard will be set inappropriately low or high and welfare will not be maximized.

The same reasoning does however not apply if the small-country assumption is given up and a country is able to influence the world price by its labor standards. In order to con-sider such term of trade effects in their analysis, Brown, Deardorff and Stern (1996) apply a general equilibrium approach to the issue of the influence of labor standards on welfare and the implications concerning harmonization. They show that if the countries are able to improve their terms of trade by establishing a labor standard, they may be tempted to establish a standard above the level which is necessary to correct any exist-ing market failure. In this case harmonization of labor standards could enhance welfare by a mutual lowering of those standards in each country. The analysis of Brown, Dear-dorff and Stern shows that the welfare consequences of imposing international labor

standards are complex and depend on the technology of production of goods and stan-dards, on whether or not standards are endogenous and on whether the country is large enough to influence world market prices. According to their analysis, harmonization of labor standards across countries may be welfare improving if nations” setting of domes-tic labor standards has an impact on world prices.

Casella (1996) contributes to this discussion by stating that free trade will cause a con-vergence of labor standards in a natural manner. She views (labor) standards as public goods which fulfill specific functions deemed desirable by the society. Hence, standards reflect the characteristics of the community concerned in terms of preferences, endow-ments and technological capabilities. Standards are thus necessarily endogenous de-pending on attributes which vary both across communities at a given time and across time within a given community. According to this line of reasoning, a nation will want to change standards as its attributes change over time. Nations with different cultures and preferences, different endowments and wealth and different technologies will, as a result, wish to establish different labor standards. Casella adopts a 2x2x2 Heckscher-Ohlin framework where the two factors of production are assumed to be high-skill and low-skill labor and the two goods to be low-tech and high-tech goods respectively. One country is relatively abundant in low-skill labor only required for the production of the low-tech good while the other country is relatively abundant in high-skill labor only used in the production of the high-tech good. She extends this model by introducing a public good,i.e. the standard which can be interpreted as a minimum age for child work-ers, which is produced by the two private goods in each country and financed through taxes collected on firms. Assuming that the standards in the two countries have no fluence on trade patterns, she finds that trade affects standards through changes in in-come. To the extent that trade produces a convergence of incomes between the two countries, it implies a convergence of standards since desired standards depend on in-come alone. Therefore, one can conclude from Casella”s analysis that, from a welfare point of view, diversity of labor standards across countries is optimal and that this di-versity is reduced by trade with labor standards converging to a higher level in both countries. Hence, establishing harmonized labor standards across countries through an international organization is not the first best policy to enhance world welfare.

While the previously reviewed models consider capital immobility across countries, Basu (1999, p. 1112-1114) introduces the possibility that firms may move to another country in order to escape strict child labor laws. Basu considers both utility maximiza-tion of households with regard to child labor supply and profit maximizamaximiza-tion of firms with regard to child labor demand. He thereby draws heavily on his multiple-equilibria model which analyses the efficiency of domestic anti-child labor policies (see section 3.1.). Basu modifies this model by assuming that all households are identical and that the demand for and supply of child labor are evenly distributed over a given number of countries (region) belonging to a global economy with the world price of the good pro-duced by this region being normalized to one due to free trade. Migration of workers across countries in this region is excluded in this setting implying that labor is country specific. In studying the impact of child labor standards on welfare, he shows that if capital mobility between regions prevails, allowing firms to move freely between those countries, a ban on child labor imposed in one country being at a “bad” equilibrium will result in flight of capital with domestic firms moving to one of the other countries in this region. Since workers in this nation will be worse off by this ban through the flight of capital and therefore may try not to comply with it, the government of the country imposing this policy will have to incur large costs of monitoring the ban, which means that social welfare is diminished. If, however, through an international labor standards agreement all nations commit to impose the same child labor standard, there will be no incentive for flight of capital since now there is no difference in costs in-curred by the firms due to different labor standards across countries within this region.

If therefore a global economy is characterized by capital mobility between a subset of countries, it is possible that an international labor standard, i.e. harmonized labor stan-dard, across those countries is more efficient than a domestic labor standard established by an individual country since the country does not incur the social costs caused by monitoring the standard.

Summarizing the results of this section, internationally harmonized child labor stan-dards are Pareto superior to domestic child labor stanstan-dards from a world welfare point of view only if countries can influence their terms of trade by labor standards or if there is perfect mobility of capital between countries of a region and child labor exists in this region. Otherwise there is no need for harmonization from a welfare-theoretic perspec-tive.

In the following section 7.2. it will be examined whether, from a welfare-theoretic point of view, trade policy in the form of sanctions or tariffs should be applied to enforce in-ternational labor standards provided harmonization of child labor standards will im-prove welfare.