Can We Reduce The Race To The Bottom... At The Bottom?

08/01/2017 11:14 am ET Updated Aug 01, 2017

Brexit and the border-adjustment tax proposed by the current U.S. administration are just two examples of a growing discontent with economic globalization in rich countries, in particular with jobs lost to outsourcing. Some low-income countries are also feeling disappointed with jobs lost to a process called “the race to the bottom,” where many poor countries deliberately decrease their labor standards to gain a comparative advantage in the global market.

However, this race to the bottom is not optimal: if country X decreases its wage levels, competing countries can also do the same thing to offset the relative competitiveness temporarily gained by X. Furthermore, a race to the bottom has perverse effects: by lowering their optimal wage level, many countries are also depressing their levels of consumption.

That is, a policy that deliberately depresses wages to attain higher competitiveness would also lead to a lower purchasing power, dampening the potential sales levels of companies. I just published an academic article in Investigación Económica arguing that countries with very low income would be better off if they agreed on a global minimum wage than if they continue this race to the bottom. Using a simple mathematical model, I showed that with a minimum wage that re-establishes the optimal wage rate for those very poor countries at the bottom, no one would be worse off because of the potential increase in purchasing power—workers would have a higher standard of living and companies would have a higher level of sales.

Thus, my analysis differs from the usual partial view of the economy where a minimum wage is only analyzed in terms of cost, not in terms of its effect on consumption or its effect as a coordinating device to reduce an irrational race to the bottom. For many multinational companies, the low wage of many poor countries limits their global sales. In other words, multinationals not only search for lower production costs, they also look for markets with a solid purchasing power. My proposal for countries at the very bottom could lead to a win-win situation: both workers and multinational companies would be better off. The growth in wages could also push up informal wages if the so-called “lighthouse effect” is assumed: informal workers benchmark the formal wage rate, so if the formal rate increases, informal wage rates would also increase.

The relevant literature has found that minimum global labor standards can be beneficial for workers in both rich and poor countries, and that paying low wages can also be costlier to firms because it would increase turnover. Given the profit margin of multinationals, Robert Pollin and his colleagues found that an increase in wages for the workers in the apparel industry in developing countries can be absorbed.

A few low-wage countries in South East Asia have agreed to increase some labor standards. Anita Chan explains why it might be important for the standards to be supported by all countries at the bottom: “China will continue to dominate the world’s export market, to the point that the new initiatives taken by Vietnam, Cambodia and Thailand may possibly collapse under the weight of Chinese competition.” Clotilde Granger and Marc Siroen contend that the inclusion of labor standards is common in preferential trade agreements, but its exclusion from multilateral trade agreements may jeopardize such an initiative.

Some firms may find it ethical to increase the level of wages for their workers, but there is a consensus that a unilateral action without a global lower boundary may cause a loss in competitiveness in the global market, as pointed out by the related literature. A binding global minimum for countries at the very bottom could correct some of these sub-optimalities and, therefore, deserves some serious consideration.