FEEM working papers "Note di lavoro" series
2005 .017

Asymmetric Labor Markets, Southern Wages, and the Location of Firms

Authors: Alireza Naghavi
Series: Economy and Society
Editor: Gianmarco I.P. Ottaviano
Type: Journal
Keywords: Labor standards,Labor market imperfection,Oligopsony,Location of firms,Minimum wages,Strategic behavior,Multinationals,Southern welfare
JEL n.: J80,F23,J42,F12,R38,L13
JEL: Review of Development Economics
Pages: Vol. 11, pp 463-481
Date: 08/2007


This paper studies the behavior of firms towards weak labor rights in developing countries (South). A less than perfectly elastic labor supply in the South gives firms oligopsonistic power tempting them to strategically reduce output to cut wages. In an open economy, competitors operating in perfectly competitive labor markets meanwhile enjoy less aggressive competitors and raise output. Finally, competition effect reduces the ex-post output of a relocating firm. These effects reduce relative profitability of the South casting doubts on traditional beliefs that multinationals are attracted to regions with lower wages. Adopting a minimum wage unambiguously enhances Southern competitiveness and welfare.

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