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.