8:50 AM Sep 12, 1995


Geneva 11 Sep (Chakravarthi Raghavan) -- Increasing wage costs in Southern manufactures and exports by higher labour standards will not help to save jobs in labour-intensive industries of the North, but would cut output and employment while increasing inequalities in the South, while also bringing down unskilled wages in the North as well as larger fall in national income in the North and globally.

In presenting this conclusion in its 1995 Trade and Development Report, the UNCTAD secretariat argues that neverthless there are good reasons for improving working conditions and reducing inequalities in the South, but these cannot be achieved through international labour standards linked to trade.

Rather it has to be achieved through redistributive policies, and fiscal reforms and active labour market policies in the South, financed by external aid to the countries of the South.

Also needed to improve conditions of workers in the North would be general employment subsidies for unskilled workers, a measure that helps both North and the South, without damaging the interests of skilled labour in the North.

Referring to the increasing cry for protectionist measures (trade-linked higher labour standards in the South) against rising unemployment blamed on imports from low-wage countries, the TDR says:

"It is to be noted that when developing countries' exports consisted largely of primary commodities, little concern for adoption of 'internationally recognized labour standards' was expressed by industrial countries. Moreover, the growing differences in labour market standards among developed countries during the 1980s, due to divergent policies, have not figured in the debate on labour standards so far."

Based on a simulation North-South trade model exercise, UNCTAD finds that given the still very large wage differentials between South and North, compared to those for productivity, "it is very unlikely that any increase in wage costs imposed on manufacturing industry in the South by higher labour standards would help save northern labour-intensive industries."

Still higher labour standards would reduce output and employment in the South, since higher wage costs depress both exports of and overall demand for labour-intensive goods -- a result that is only partially offset by improved terms of trade.

This would also result in increased inequalities in the South, as part of the labour force becomes unemployed and is unable to benefit from the type of social safety nets available in the North. Wages of the unskilled would also go down in the North because of increased import costs, and there will be an even larger fall in national incomes in the North, resulting in a further decline in global income.

The TDR adds that the simulation exercises suggest real grounds for scepticism on desirability of international labour standards linked to trade and such measures are unlikely to achieve the desired labour objectives in the North.

And since the countries that have successfully penetrated northern markets have been catch-up economies with rapid real-wage increases alongside productivity growth, "it seems unlikely that the kind of higher labour standards being called for would be applied to them and hence would have much impact on their ability to compete.

"Rather," says the TDR, "they would hurt those countries in the South that already face difficulties in exporting. In most developing countries, as in the North, wages in the export sector already tend to be higher than in other sectors, a situation that would be further exacerbated by introduction of higher labour standards."

"Nevertheless," says the TDR, "there are good reasons for improving working conditions and reducing inequality in the South. But the most appropriate response should be to design and implemented redistributive policies which do not impede the growth of southern manufactured exports.

"One possibility would be to introduce fiscal reforms and active labour market policies of benefit to the unskilled in the South. But these involve programmes to provide subsidies for retraining, as well as effective welfare support. Developing countries will have major difficulties in financing such programmes. While fiscal reforms could undoubtedly help fund these programmes in some countries, financial assistance from the North would be essential."

The simulation exercise by UNCTAD shows that to achieve a shift in relative incomes of skilled and unskilled (a 50% rise in relative wages of unskilled workers) through fiscal transfers would require a 7.4% tax rate on wages of skilled workers and a 39.6% subsidy to employers of unskilled workers.

"This is a globally efficient solution because all prices are at the perfectly competitive level (no change in terms of trade and pre-tax relative wages) and there is full employment. In this scenario, the unskilled are not made better off at the cost of unemployment".

Discussing the distributional effects of trade in the North and the relative merits of unemployment benefits and employment subsidies, UNCTAD finds that skilled workers in the North are better off when taxes are spent on employment subsidies rather than unemployment benefits, but only marginally.

Their tax rate is higher, but their pre-tax real wages are also substantially higher.

This because though employment subsidies for unskilled labour reduce relative demand for skilled labour, they increase overall demand for labour by raising national income. And since income effect of employment subsidies is greater than substitution effect, the demand for skilled labour rises, sharply increasing the pre-tax wage, much more so than taxes on their incomes required to pay for employment subsidies instead of unemployment benefits.

The employment subsidies for unskilled workers in the North also help the South. Being general subsidies for unskilled -- and not industry-specific to protect labour-intensive production -- they encourage greater employment and production in all sectors, including those not competing with southern exports. Also, by raising national income in the North, they increase global demand for labour-intensive goods, thus improving the South's terms of trade and raising its national income.

Thus employment subsidies for unskilled benefit both North and South, and this outcome is not sensitive to choice of parameter values.

"Such policies would be less costly than potential damage to the world economy from enforced higher labour standards linked to trade and would also help to strengthen the multilateral trading system."

In a simulation North-South trade model exercise UNCTAD finds that given the very large wage differences between North and South, as compared to the productivity differences, even if the relative cost of unskilled labour in the South is raised by fifty percent, it does not suffice to make the northern labour-intensive industry competitive.

While competition from Southern imports stimulate defensive innovation at enterprise levels, the total size of the sector is dramatically reduced in size despite large productivity gains, while the survival of a small number of super-efficient producers in the North further depress world prices and shifts the terms of trade against the South.

But with enforced rise in wage-costs in the South, both output and employment fall, since higher wage costs and export prices depress both exports of, and overall demand for, labour-intensive goods.