Laws of Labor

Laws of Labor Core Labor Standards and Global Trade by Maria C. Mattioli, V. K. Sapovadia From International Trade, Vol. 26 (2) – Summer 2004(Harvard International Review)

Maria C. Mattioli is a research fellow at the Center for International Studies at the London School of Economics. V. K. Sapovadia is Professor of Law and Finance at Gujarat University, India, and a consultant to the World Bank and Asian Development Bank.
Domestic policies to implement workers’ rights have trade-offs with international trade’s impact on labor markets. It is important to consider that labor markets and their regulation are undergoing sweeping reforms due to the progress of international trade negotiations in developing countries. Improved labor rights create a solid base for strong and stable economic growth and attract foreign direct investment (FDI). Attracting FDI contributes to job creation and therefore to poverty reduction.
In the past decade, international pressure, sometimes followed by the threat of commercial sanctions, has been the catalyst for many countries to review their laws to ensure respect for internationally recognized labor rights, especially those named by the 1998 International Labor Organization (ILO) Declaration. This article aims to show the status of child labor, forced labor, and the efforts of concerned governments and other stakeholders to set the investment climate in the right direction.

Expanding global service and production networks can accelerate growth in developing countries. The expanded networks can then successfully harness competition to encourage efficient investment. Efficient investment does not simply mean more investment; recent research demonstrates surprisingly little short-run correlation between investment levels and growth. Instead, investment and its productivity are inextricably linked to domestic policies that, when taken together, broadly make up the local investment climate.

Sound enabling policies, including good governance, institutions, and property rights, can help attract more domestic and foreign private investment. Policies that promote competition and entrepreneurship increase the efficiency of such investment. Institutions are made and run by people; it is these people who should remain at the center of any policy decisions. This is why labor policy is an important factor in garnering investment and promoting sustainable development and growth. Meanwhile, complementary public investment adds to overall productivity growth.
A stable macroeconomic environment is essential for a country to realize its investment potential. Sound policies in good governance, institutions, and property rights contribute to a positive investment climate, which is essential to accelerating growth and reducing poverty. Good public governance, which includes transparent rules, low corruption, and respected property rights, encourages investment and promotes economic growth. Many countries try to use specific investment policies, such as tax incentives, to attract
investment or to channel it in particular directions. Such schemes are often poorly designed, inadequately implemented, costly, and primarily benefit investors who would have invested anyway. Various ILO studies demonstrate the importance of rules governing rights and obligations of employees and employers in promoting a stable environment.

In many countries, public and private barriers have either discouraged private investment or have channeled it into less productive activities that reduce economic growth.

But promoting a positive investment climate does not imply a laissez-faire approach to the economy. Rather, it requires active government efforts to reduce barriers that stifle entrepreneurship and competition. In his speech at the Third Annual Global Development Conference in Rio de Janeiro in December 2001, Brazilian President Fernando Henrique Cardoso emphasized the importance of global requirements in correcting the investment climate: “More than ever before, scientific and technological breakthroughs have come increasingly close to the world of labor. Upgrading the skills of the labor force is no longer an option: it has become an imperative.” Investment is made in human and nonhuman resources, but humans make the non-human assets work.

The 1998 ILO Declaration

The most basic labor rights have been codified by the ILO in the 1998 Declaration of Fundamental Rights at Work after some developed countries tried to include them at the WTO’s Singapore Meeting in 1996. The declaration outlines five “core labor standards” (CLS) that all labor markets should strive to meet: freedom of association, the right to collective bargaining, abolition of forced or compulsory labor, elimination of child labor, and freedom from discrimination.

The arguments for enforcing these rights rely on a moral and reputational basis that uses the “Follow Up Mechanisms” developed by the ILO. However, enforcement has noticeable economic implications as well. A growing number of people highlight the economic benefits of these core labor standards, which are well summarized by Economic Policy Institute economists Josh Bivens and Christian Weller. They note that improved worker rights have contributed to higher productivity growth, and thus faster economic growth, better distribution of income among people and between workers and firms, and more stable and strong local demand, which reduces the chance of a financial crisis.

Labor standards and their implementation did not merely arise to promote economic growth. They also emerged as a new and important area of concern for socially responsible investors, especially in the “problematic” footwear, apparel, and toy industries. For most investors involved with this issue, the fundamental matter of concern is the protection of human rights in the workplace. This is why there is a strong movement to consider the core labor rights defined in the 1998 ILO Declaration as “universal human rights.” The ILO Declaration on Fundamental Principles and Rights at Work declares inter alia that all member states, whether they have ratified the relevant
conventions or not, have an obligation due to their membership in the ILO, to respect, to promote, and to realize in good faith and accordance with the Constitution, the fundamental rights which are the subject of those conventions.

The 1999 Report of the Director General to the International Labor Conference addressed decent work. In his report, Director General Juan Somavia emphasized that the “primary goal of the ILO today is to promote opportunities for women and men to obtain decent and productive work in conditions of freedom, equity, security and human dignity. The ILO is concerned with all workers. All those who work have rights at work. The ILO is concerned with decent work. The goal is not just the creation of jobs but the creation of jobs of acceptable quality.” Somavia also pointed out “two fundamental assumptions: that free markets are sufficient for growth, and they were very nearly sufficient for social stability and political democracy. …confused technical means of action—such as privatization and de-regulation—with the social and economic ends of development. They became inflexible and did not take the social and political context of markets sufficiently into account.” Increasing doubts about the efficacy of these prescriptions after a decade of experience in the transitional economies came to a head with the recent crisis in emerging markets.

In several countries, like India and Brazil, the full opportunity for each worker to be considered for a job for which he is well-suited irrespective of race, color, sex, religion, or political opinion became a fundamental right by virtue of constitutional provisions. Economic research on labor rights shows that these and other labor rights lead to significant increases in economic growth in nations where they are implemented and enforced. This is particularly true of child labor and forced labor, which in theory increase the supply of cheap labor. Easy access to cheap labor removes incentives for firms to invest in new technologies and consequently, as children are deprived of an education, nations lack a good stock of human capital. In the future, they will even face a potential decrease of productivity.

According to the World Bank there are two justifications for Core Labor Standards (CLS): they are an important mechanism for poverty reduction and social and economic development. Indeed, access to safe and productive work is a critical factor in reducing poverty, and the legal, executive, and judicial framework surrounding employment is a central means of job creation and worker protection. CLS thus have a human rights explanation and an economic justification. The first human rights explanation relies on the claim that work is the central activity of human life and is associated with the improvement of human beings’ dignity. This argument justifies the ILO’s role in social adjustment, including a focus on social policy and the appropriate institutional framework for delivering social protection. The ILO program on decent work is in perfect agreement with this view. The program has regional arms to promote “opportunities for men and women to obtain decent and productive work, in conditions of freedom, equity, security, and human dignity” in various regions.
The second justification is concerned with the inclusion of CLS in trade agreements. By analyzing intellectual property rights and their relation to the global economy, economists see CLS as a self-justified case. According to some, including economist Thomas Palley of American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), CLS should be made a central element of the system of global governance that is now being constructed, and all countries should be pushed to conform to these standards. Unfortunately, labor standards are frequently accused of being a form of hidden protection for industrialized countries because they allegedly ruin the comparative advantage of workers in developing countries. This claim is fundamentally wrong. Labor standards are good for both developing and developed countries, and exemplify how good economic policy can promote win-win outcomes.

Eliminating Child Labor and Forced Labor

Of the five rights embraced by the 1998 ILO Declaration, the eradication of child labor and the elimination of forced and compulsory labor are the two issues that most influence economic growth and investment, because of the claim that they produce cheap labor. Child labor is a widespread phenomenon. The legal age limit for work is being violated constantly, especially in instances of hazardous work. According to the 2003 ILO Report, A Future Without Child Labor, there are at least 17.4 million children working in Latin America and in the Caribbean. It is also estimated that 50 percent of child labor is located in rural areas and that 90 percent is on an informal basis. In Ecuador, there are 500,000 children from 5 to 14 years old currently employed. In Peru, there are 1.8 million children between the ages of 10 and 14 working, in Colombia, 700,000 children between 10 and 14, and in Argentina, 252,000 children between 10 and 14.

Studies have revealed a positive correlation—in some instances a very strong one— between child labor and poverty. Poverty itself has underlying determinants, such as class. When analyzing the caste composition of child laborers, International Institute for Population Sciences researcher Parveen Nangia observed that if these figures are compared with the class structure of the country, a comparatively higher proportion of lower class children work at a younger age to support themselves and their family. Nangia found in his study that 63.74 percent of child laborers said they worked to contribute to family income. For many families, there is no other alternative.
Research on poverty and worklessness by economist Steve Nickell of the London School of Economics shows that the connection between poverty, worklessness, and child labor is strong. If two or more people in a household work and at least one works full-time, poverty is unlikely. And over 53 percent of poor children live in workless households, whereas only around 20 percent of children overall live in workless households. If there were not poverty, there is a strong likelihood that would not be child labor. An additional study done by Marcelo Neri and his colleagues at the Brazilian Institute for Economics suggests that the father’s income has a significant negative correlation with the child’s probability of beginning to work, dropping out of school, and repeating a grade. Evidence collected from Brazil seems to suggest that child labor tends to trade off with both school and leisure. Although the majority of children who work in Brazil are also enrolled in school, the comparative rates of enrollment between those who work and those who do not illustrate the impact of child labor on educational outcomes. Among children aged 10 to 14 who are working, 86.7 percent are enrolled in school, while 96.4 percent of those who are not working are enrolled in school.

Richard Young of United Nations Childrens’ UNICEF India argued that no economic argument justifies child labor, saying that if there is no money in the family, it is not the fault of the child; it is because the adults have failed them. If a child starts working to support the family, then by the time he is legally old enough to work, he may no longer be in a position to work because of serious work-induced ailments. The vicious cycle continues with the younger siblings being forced to work in order to support their parents and sick older siblings.

The significant impact that early entry into the labor market has on a child’s future earnings and educational outcomes is only one of the many problems of child labor. One problem with the elimination of child labor is the subsequent decrease in family income. Simply cutting off this income would make needy families poorer. This is why a mechanism to facilitate the transition away from child labor needs to be developed. Education has been used as the central tool to achieve the goal of the much larger problem of poverty.

Conclusions

Labor is both an essential factor of production and the main economic asset of individuals. Improving labor productivity and enhancing access to decent jobs create a strong investment climate and are central to growth and poverty reduction. The skills and health of individuals affect their ability to participate in society, escape poverty, cope with change, and contribute to productivity and growth. The availability of skilled and healthy workers can also be an important factor affecting investment and production location choices.

The relationship between labor standards, investments, and growth shows an important correlation: a state’s respect for CLS—especially those related to the fundamental rights at work, as defined by 1998 ILO Declaration—attracts FDI, as far as it contributes to social stability, to that state’s economy. This stability in turn induces the consolidation of democracy and thus assures investors of the necessary political and legal stability. Fundamental labor rights therefore play a significant role in the performance of labor markets, particularly those of developing countries.

The remaining question is whether the implementation and enforcement of CLS—or fundamental labor rights in particular—affects economic growth. In recent research, David Kucera of the International Institute for Labor Studies concluded that it is not possible to show that the implementation, enforcement, and application of fundamental labor rights contribute to or detract from economic growth. The Organization of American States (OAS) poses the question in a different way, arguing that the countries that show more economic development are those that have received more foreign investments, such as Chile.

The OAS report assumes that investments are attracted by the following factors: effective domestic or external demand for goods and services, macroeconomic stability (especially of interest and exchange rates), legal and judicial stability, high-skilled workforce supply, and a culture of social dialogue and dispute resolution. The implementation and enforcement of fundamental labor rights are strongly related to all of these factors. An effective demand for goods and services is highly related to a good consumer market. In order to have a good consumer market, it is necessary to reduce poverty—poor people are unable to consume much. By using education to eradicate child labor, a country invests in skilled workers for the future, which is exactly what investors seek. The World Bank stated in a 2002 Report, “In countries that have improved their international linkages through trade reform, the demand for educated workers has generally increased, as new technologies are adopted which are complementary with skilled workers. But this has increased more in countries that carry out trade reform with labor markets that facilitate this reallocation of workers.” In order to achieve a culture of social dialogue, countries need to guarantee the right of freedom of association and the right to collectively bargain with employers. It is imperative to enforce these two fundamental rights, which were enhanced by ILO Conventions Nos. 87 and 98. A well-functioning judiciary and other mechanisms of dispute resolution depend on the enforcement of fundamental civil and political rights.

Kucera, using the same research mentioned by OAS, writes that “as these survey results and the passage quoted from Hanson suggest, the market for unskilled labor is less relevant for multinational firms and for FDI location decisions than the market for skilled labor. In this sense, the causal channel through which reducing child labor may lead to more FDI (by increasing human capital) is more directly linked with the determinants of FDI location than the causal channel through which reducing child labor may lead to less FDI (by increasing labor costs in the unskilled labor market). For these reasons, too, the relationship between FDI and labor standards is quite multifaceted. … There may be further positive effects of higher labor standards on FDI as multinationals endeavor to avoid bad publicity, product boycotts and the like, resulting from investing in countries with low labor standards.”

The implementation and enforcement of fundamental labor rights is a tool for achieving a stable democracy, a highly skilled workforce, and a stable legal and judicial power. The process of economic integration is not the cause of labor market failures. There is no evidence that economic integration is responsible for job destruction, wages decreases, or rising poverty. It is, however, an appropriate instrument for trade and investment flows. Economic integration contributes to economic improvement and job creation, although it does not have sufficient potential to balance the effects that market liberalization may bring.

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