Economic Integration,International Capital Movements,and Labour Standards

Abstract. The paper develops a model where more integration initiates a movement towards the bottom of labour standards when increased integration enhances the flow of capital and so increases the marginal gain of a reduction in the strictness of standards. Moreover, a Pareto improving common international standard with higher strictness than in the Nash equilibrium can be negotiated among countries with the same preference for employed worker protection versus social efficiency. When preferences differ between countries, an agreed common or minimum strictness of labour standards will typically not be Pareto improving, but to the detriment of the country that gives less weight to the protection of employed workers. However, in this case there is also a Pareto improving solution, which raises the strictness of labour standards compared to the Nash equilibrium for both countries, but at the same time accepts different country standards reflecting their different preference.