Working Paper: CEPR ID: DP1931
Authors: Tito Cordelia; Isabel Grilo
Abstract: Public opinion in Europe seems worried about the effect of lower-wage country competition. In both newspaper articles and in policy debates, the term ?social dumping? is becoming more and more popular. In many countries, trade unions worried by the effect of what they call ?unfair competition?, propose the adoption of a ?social clause? protecting domestic markets from commodities produced in countries were minimal labour conditions are not met.We analyse the effects of such a policy in the framework of a vertically differentiated Bertrand duopoly. In particular, we study the effects of such a policy on the relocation decisions of the firms and perform a welfare analysis. The welfare analysis takes explicitly into account the unemployment situation in the domestic country by accounting for the workers? welfare losses due to job reductions following the relocation of firms.We characterize the optimal social clause policy both under domestic welfare maximization and from an efficiency point of view. We show that, on domestic welfare grounds, the case for a social clause policy is weaker the higher the domestic wage and the lower the foreign wage.
Keywords: production; relocation; vertical differentiation; social clause
JEL Codes: F02; F12; F23; J60; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| social clause (Z13) | relocation decision (J62) |
| wage differentials (J31) | effectiveness of social clause (D71) |
| social clause (Z13) | incentives to relocate (J62) |
| high domestic wages and low foreign wages (J31) | case for social clause policy (J58) |
| social clause (Z13) | relocation of one firm (R30) |
| relocation (J62) | unemployment situation in domestic country (J64) |
| relocation (J62) | welfare losses due to job reductions (J65) |