Global Value Chains and Labour Standards: The Race-to-the-Bottom Problem

Abstract We ask how globalisation affects governments’ incentives to set labour standards for workers. In a stylised global value chain model, globalisation by reducing trade costs or adding countries with complementary skills improves working conditions, whether set by employers or governments. Addition of countries with similar skills has the opposite effect. Equilibrium labour standards are actually stricter than optimal because each country passes some of the costs of its improved labour standards onto other countries (consumers of the final good, for example). Nash equilibrium tariffs make regulation of working conditions redundant, but multilateral reduction of tariffs brings them back into force.