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Odd Couple: International Trade and Labor Standards in History

Author(s):Huberman, Michael
Reviewer(s):Baumann, Brittany A.

Published by EH.Net (October 2012)

Michael Huberman, Odd Couple: International Trade and Labor Standards in History. New Haven, CT: Yale University Press, 2012. xii + 237 pp. $65 (hardcover), ISBN: 978-0-300-15870-0.

Reviewed for EH.Net by Brittany A. Baumann, Department of Economics, Boston University.

In Odd Couple: International Trade and Labor Standards in History Michael Huberman argues that history in a global perspective reveals a causal relationship between free trade and labor standards. His claim is that not only did trade expansion induce the adoption of labor restrictions, but reverse causality exists as well. The pairing is ?odd? in that their relationship is not obvious, and the reverse causality may seem controversial. Nonetheless, the linkages are an interesting contribution to both economic history and modern perspectives on trade.

Between 1870 and 1914, changes in trade policy and labor standards were significant. The labor standards, which Huberman denotes as the ?labor compact,? pertain to labor regulations ? work age requirements, work hour restrictions ? and social entitlements ? accident insurance. As countries became increasingly open to trade, they also began adopting labor restrictions, precipitating the rise of welfare states. The traditional view is that industrialization led to rise of the factory system and urbanization, propagating a demand for greater protection of worker welfare, thereby leading to greater state intervention. Huberman stresses the significance of trade expansion as a causal influence for a labor compact. In eight thorough chapters Huberman describes how these two policies reinforced each other in the late nineteenth century Old and New Worlds. Historical data and regression analysis combined with his strong grasp of economic theory provide a convincing body of evidence.

Chapter 1 motivates the topic by focusing on the views of a political figure of the period, Emile Vandervelde, economist and patron of the Belgian Labor Party. Vandervelde was a steadfast supporter of free trade and influenced Belgium to become one of the first European economies to lift trade barriers. Vandervelde?s free trade ideology was the following: despite the welfare gains from trade in the form of higher wages, risks such as dislocation and employment uncertainty also rise in open economies. Hence, he believed free trade should be contingent on the adoption of labor standards to offset the costs of trade openness.

Huberman?s goal is to understand how this free trade ideology developed differently across nations and to reveal its linkage to labor standards. He limits his detailed analysis to three countries: Belgium to represent the labor abundant Old World; Canada, for the land abundant, richer New World; Brazil, for the New World of the southern hemisphere. Fortunately, the analysis also spans other important economies such as the U.S. and the UK.

Huberman divides the book in two parts: Part I describes how globalization induced the labor compact, and Part II describes the reverse causality. Chapter 2 that begins Part I paints a picture of the global economy in the late 1800s. To support his claim that international pressures explain the rise of the labor compact, he outlines the benefits and costs of trade, and shows why the labor compact reinforced the benefits and helped to offset the costs. The gains from trade are standard: increased market size, specialization, and, depending on the type of export, wages. Trade can be costly by lowering wages and raising employment risks, and its impact depends on the elasticity of substitution between foreign and domestic goods. To provide evidence of increased uncertainty in open economies, Huberman shows an increasing relationship between terms of trade and trade openness in both the Old and New Worlds. Huberman claims that the labor compact, besides providing social insurance against heightened trade risks, incentivized firms to invest in more efficient technology. This claim is powerful and is the recurring subject for the rest of the book. As evidence, Huberman uses regressions to uncover the effects of trade risk factors on labor legislation adoption, showing that legislation increases with trade openness. In logit regressions Huberman also reveals that trade facilitates country convergence in labor standards in Europe, yet not in the New World. He provides theoretical evidence that affirms that economies have incentive to harmonize labor standards in order to reap bilateral trade benefits.

Giving both empirical evidence and theory, Chapter 3 explains the divergence in labor and trade policy adoption between the Old and New Worlds. Adoption of labor standards was uneven and delayed in the New World compared to in Europe, as was free trade. The Stolper-Samuelson theorem can partially explain the opposing views between the Old and New toward free trade. The theorem predicts wages to fall in an economy, for example, Canada, exporting a land-abundant good. Immigration also contributed to lower wages. Hence, the New World was reluctant to support free trade since it hurt workers, and instead advocated tariff protection and immigration restrictions. On the other hand, Old World countries such as Belgium were inclined to support free trade by recognizing the benefits of a lower cost of living and reduced wage pressures for firms. In enacting free trade, countries advocated the labor compact in order to provide protections from trade risks. Coincidentally, Belgium adopted labor standards in a short period during which no tariffs were increased.

Chapter 4 develops the argument that open economies had incentives to harmonize their labor standards. The plethora of international conferences on labor standards, mostly held in Europe, motivates this view, and such conferences in fact did not contest free trade but had a primary goal of securing worker gains from trade with labor reform. Huberman confirms their significance by showing that country attendance was related to a higher likelihood of adoption. He suggests that bilateral labor treaties had more clout, given that a pair of countries had incentive to raise standards in order to gain market access through free trade. In a regression of trade costs on labor treaties, a significant negative relationship does exist for the Old World.?

The next three chapters are devoted to the reverse causality ? the labor compact inducing globalization. The main mechanism behind this causality is as follows: labor reform raised wages which raised firm productivity, shifting comparative advantage and enabling firms to export more. Here Huberman does justice to modern trade theory in describing the behavior of exporting firms: exporters are larger, pay higher wages, and are more productive and skill- and capital-intensive. By reducing labor supply and raising wages which incentivizes firms to become more efficient, the labor compact should induce more firms to export and thereby amplifies trade on both the intensive and extensive margins. This mechanism, however, lacks evidence and therefore appears weakly founded to an economist.

Odd Couple next turns to a discussion of the wage distribution. Chapter 5 explains how the trends in inequality during the period were related to the evolution of the labor compact and trade. Citing historical inequality experts Peter Lindert and Jeffrey Williamson, the author explains why inequality widened within New World countries relative to the Old: since the New World adopted a labor compact relatively later, the skill premium did not narrow in this region. Nevertheless heavy immigration would deliver the same effect, as Huberman mentions. Yet this argument is not complete in that this region was less open, and freer trade tends to raise inequality. Huberman continues by addressing between-country inequality and claims trade lessened inequality between the labor-intensive Old World and the labor-scarce New World. Although the trends in inequality are well-explained, the chapter seems to forget about the theme of Part II by leaving out the labor compact.

Fortunately the next chapter presents empirical evidence. Focusing on the textile sector, Huberman asserts that scarcity of labor ? a by-product of the labor compact ? induced exporters to upgrade technology. In charts of spindles per ring and per mule 1880-1914, he shows that the New World became more productive with greater specialization relative to the Old World. One reason would be that the New World adopted the labor compact more extensively during these years. As mentioned earlier, this mechanism is weak; Huberman even acknowledges that labor laws worsen trade flows in the short run by raising marginal costs, with regressions of trade balances to confirm it.? A multinomial logit model confirms trade openness increased convergence of low-cost labor laws, more so in the Old World, yet ironically confirms the opposite direction of causality. Thus the evidence is far from convincing.

Brazil presents a puzzling counter-example to his case. A collapse in trade in the 1920s proceeded implementation of labor laws, which Huberman?s hypothesis does not predict. Brazil only provides an example that the determinants of trade openness go far beyond labor policy. Nevertheless, the collapse of trade may have further stunted the rise of a welfare state. Huberman concludes that Brazil did not completely adopt a labor compact after enacting free trade in the 1980s because the economy lacked the historical precedent ? the precedent of adopting a labor compact during a period of global trade expansion.

Chapter 7 is an interesting, though somewhat extraneous, analysis of the divergent trends in labor hours of the New and Old Worlds. Both witnessed a decrease in hours since 1870, yet toward the end of the twentieth century the New World had relatively longer hours. The labor compact, being more fully adopted in the Old World, contributed to shorter hours due to greater regulation and work sharing. Huberman offers other sources of divergence: inequality and social emulation, labor power, work ethic, and religion. To connect to his hypothesis, Huberman shows that hours decline with trade openness in 1914, and the trend holds in 2000. Huberman hastily concludes that globalization contributed to a wedge between the social models of the New and Old Worlds.

In Odd Couple, Huberman provides a thorough description of the world economy during a phase of trade expansion and labor reform. An important conclusion is that the differences between the New and Old World labor standards and trade policy can actually explain the divergence in social models today. However, the book contains far-reaching conclusions. For example, Huberman asserts the collapse of trade in the 1930s was partially due to the failure to enact and harmonize labor standards. The passage of the New Deal along with the empirical evidence that recessions lead to collapses in trade flows drastically weaken this claim. The direction of causality from labor reform to trade expansion requires theoretical backing in addition to more empirical evidence. That the labor compact promoted higher efficiency and a shift of resources to export industries is another far-reaching assertion that remains unconvincing. Regardless, the book reveals unexpected yet interesting economic linkages and gives modern-day policy standards a new historical perspective.

Brittany A. Baumann is a Ph.D. candidate in Economics at Boston University. Her fields are International Economics, Macroeconomics, and Economic History.

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Subject(s):Government, Law and Regulation, Public Finance
International and Domestic Trade and Relations
Labor and Employment History
Geographic Area(s):General, International, or Comparative
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII