Social Dumping in the Transformation Process

Business representatives and union leaders in highly industrialised countries often accuse the governments of less-developed countries of practising social dumping in the sense of deliberately neglecting work-place safety legislation, co-determination rights and other fringe benefits which define the quality of workplaces. This paper refutes this view by modelling the transition path of a less-developed small open economy that faces transactions costs when trading capital and labour with the rest of the world. It shows that competitive markets and competitive governments choose Pareto efficient transition strategies which are characterised by a sluggish development of market wages and government-imposed social standards.