The Effects of Increasing Labor Cost in Developing Countries and Its Impact on International Trade

摘要

The global interest concem towards equalization and the drive for economic growth anddevelopment for any nation state is central to that country's labor situation. The direction ofeconomic agents has always been the race to the top, a view that is consistent in the literature.This research theoretically focuses on the growing cost of labor in developing countries amidstupsurge in the European debt crisis, the quest for more social reforms affecting Africa and theArab world and the slow pace of the world economic recovery from the recent financial crisis.Does an increasing labor cost in developing countries affect the choice of production, theownership structure, consumption and trade?
　　 In a bid to solve this problem, we first conceptualize the traditional general equilibriummodel depicting three countries, representing a developing, emerging and a developed country inwhich R&D is common knowledge and we attempted to examine also empirically therelationship between the export of .goods and services as a percentage of GDP in ten countriesboth developing and developed and labor cost for the period 1981-2010 using the fixed effectmodel after a Hausman test (Dehejia and Samy 2004,2006). Our work draws lessons from PaulKrugman's (1991) and Inderst and Valletti's (2009). We extensively search the literatures onlabor, development, outsourcing and R&D and we came to the conclusion that these concepts areinterconnected, dynamic and unique to each nation state.
　　 These things said, high labor cost can affect prices of final goods elsewhere and triggermovement to an advantageous location. From an empirical perspective our study reveals that aloss of export revenue due to growing labor cost could be compensated through householdconsumption expenditure as domestic market revenue increase. This is consistent with the signsof our prior expectations in which Research and Development and manufacturing are positivelycorrelated to export while household consumption expenditure negatively correlate to tradewhich implies that there is growth in domestic market and domestic revenue. We concludedthat this situation presents an opportunity for developing countries to reinforce production athome because skilled employees having high wages and low skilled labor can benefit fromvarieties of goods and this will boost domestic market and consumption and balance the effect oflabor cost and also stabilized trade. Our study could serve as a policy guide to govemment inboth developing and developed countries.