Published on Harvard International Review (http://hir.harvard.

edu)

Laws of Labor
May 6, 2006 by V. K. Sapovadia and Maria C. Mattioli
Issue: 
International Trade [1]
Core Labor Standards and Global Trade

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 non-human 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

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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