The rise of trade and social protection

Michael Huberman y Christopher Meissner, VOXEU, 23 de octubre de 2009 (texto en inglés

Globalisation is commonly perceived as unleashing a race-to-the-bottom in labour regulation, environmental standards, and social protection, although evidence from earlier and current waves of globalisation suggests otherwise. Still the prejudice persists. Summarising studies like Dani Rodrik’s (1998) on the relation between social spending and openness, Larry Summers (2008) speaks for the sceptics. “The findings prove nothing. That social protection and integration came together does not call into question my thesis that global considerations constrain competitiveness.” Furthermore, Matthias Doepke and Fabrizio Zilibotti (2009) have recently questioned the effectiveness of international labour legislation because it may penalise those who in fact are intended to benefit from it like poor families.

New evidence

The historical record we have uncovered strongly challenges the sceptics’ views (Huberman and Meissner, 2009). Our research suggests that ensuring market access decreases the costs of adopting labour standards. Greater trade links provide greater incentive to raise labour standards. Figure 1 summarises our evidence.

For a sample of eighteen leading countries on four continents between 1880 and 1913, a period that saw the birth of the welfare state and labour market intervention, we give the total number of adoptions at the country level for five pieces of labour law.1 We also track the decline in trade costs for the same group of countries. Lower trade costs mean more international trade. Contrary to the race-to-the-bottom view, we find that greater trade links accompanied improved social protection.

Figure 1. The rise of trade integration and labour protections, 1880-1913

Notes: Labour standards include five separate categories of protection. The number presented counts the number of countries that have adopted each labour standard. The maximum for the 18 countries in the sample is 90. Trade costs measure the average tariff equivalent of trade costs within our sample. As trade costs decrease, international trade rises.

To understand the mechanism behind the relation in Figure 1, we need to go beyond standard explanations for the rise of social protection. The narrative has frequently been written as a chapter of national history in which higher incomes, greater democracy, and stronger unions are the usual suspects. Rodrik’s view that workers demand more social protection because of the increased risk associated with greater degrees of trade openness is largely an extension of this line of reasoning. But this explanation must be incomplete. Rich and poor countries alike, as well as the most and least democratic states, adopted similar labour laws in a short time span before 1914. Moreover, what prevented the unravelling of levels of labour protection as international competition rose?

Our claim is that trade itself was a pathway of diffusion for better labour regulation and social entitlements. In an interdependent world, domestic and external factors were entangled and the outcome was the rapid diffusion of social policy. States, typically the largest countries in Europe who were the first adopters, could use either the threat of a reduction in market access or the incentive of enhanced access to leverage an improvement in their trade partners’ labour regulations. Leverage was likely to be much larger where trade was more important.

Consider the case of France after it adopted regulated night work of women because of domestic pressures. This increase in labour regulation was the economic equivalent of lowering French tariffs. Imports became cheaper and exports more expensive as labour standards increased the relative cost of labour. To retain its market share, France had to convince its trading partners to lower tariffs or raise labour standards. When the Swiss refused, the French retaliated and closed their borders to the import of Swiss specialty items, like gruyere cheese. Soon after, the Swiss adopted French legislation. With Italy, the French were more conciliatory. In return for implementation of labour laws in Italy that more closely matched those in France, they opened up their market to Italian wines and silks. Both parties gained. French exports rose because Italian labour costs were now higher. Italian workers were better protected and exports to France increased. By 1914, conciliation trumped retaliation via trade wars. Countries recognised that better labour laws led to improvements in integration and further gains from international trade could be realised.

Recently, Kyle Bagwell and Robert Staiger (2004) have proposed that the WTO can guarantee market access for countries which improve their labour regulations by compelling trade partners to lower tariffs. In the historical evidence we have uncovered, countries seem to have acted in farsighted fashion. Even in the absence of a multilateral institutional arrangement, greater trade and better social protection can be achieved.

Footnotes

1 These are the introduction of factory inspection, minimum age laws for children, maximum hours for women, limits on women’s night work, and accident compensation.

References

Bagwell, Kyle and Robert W. Staiger (2004), The Economics of the World Trading System. Cambridge, Mass.: MIT Press.

Doepke, Matthias and Fabrizio Zilibotti (2009), “Child Labour: Is International Activism the Solution Or the Problem?” VoxEU.org, 12 October.

Huberman, Michael and Christopher M. Meissner (2009), “Riding the Wave of Trade: Explaining the Rise of Labour Regulation in the Golden Age of Globalisation.” NBER Working Paper 15374, September.

Jacks, David, Christopher M. Meissner, and Dennis Novy (2008), “Globalisation and the Costs of International Trade from 1870 to the Present.” VoxEU.org, 16 August.

Rodrik, Dani (1998), “Why Do More Open Economies Have Bigger Governments?” Journal of Political Economy 106 (no. 5): 997-1032.

Summers, Lawrence (2008), “Preserving the Open Economy at Times of Stress.” Financial Times, 21 May.