Reports & Publications

Can RTA Labor Provisions Prevent the Deterioration of Domestic Labor Standards?: the Cases of Statutory Minimum Wages and Employment Protection Regulations

Discussion Papers

No.716

by Isao Kamata

April 2018

ABSTRACT

This study investigates whether labor clauses in regional trade agreements (RTAs) are effective to maintain or improve the domestic labor standards in the signatory countries. The effects of RTA labor clauses on two measures of labor standards, statutory minimum wages and the strictness of employment protection, are empirically analyzed using a unique dataset that classifies the population of effective RTAs into those with and without labor clauses, together with multi-year data on minimum wages and the indicator of employment-protection strictness for a wide variety of countries. The result shows that having labor-clause-free RTAs with more or larger trading partners are associated with lower statutory minimum wages although this negative association is not found for labor-clause-inclusive RTAs. The separate estimation for countries in different income groups further demonstrates that this result is chiefly driven by middle-income countries that sign RTAs with high-income partners, implying that signing RTAs with more or larger high-income trading partners would create to the government of a middle-income country, which has a comparative advantage over the high-income partners in labor-intensive sectors, a downward policy pressure on statutory minimum wages whereas labor clauses could alleviate such a negative policy effect of RTAs on minimum wages. This finding is also contrasted with the case of actual wages for which no evidence is found for the impact of RTAs with or without labor clauses to reaffirm that labor-clause-free RTAs could create downward policy pressure on statutory minimum wages but RTAs might not bring market pressure on actual wages regardless of whether or not the RTAs include labor clauses. Finally, unlike this case of statutory minimum wages, the empirical analysis finds no clear evidence for the potential impacts of RTAs either with or without labor clauses on the strictness of employment protection in the signatory countries.

Keywords:International trade, Regional trade agreements, Labor clauses, Minimum wages, Employment protection

JEL classification: F13, F14, F16, F66, J81, J88

Please note that discussion papers are works in various stages of progress and most have not been edited and proofread and may contain errors of fact or judgment. Revised versions of these papers may subsequently appear in more formal publication series. The views expressed in this publication are those of the author(s). The IDE does not guarantee the accuracy of the data included and accepts no responsibility for any consequences arising from its use.