Trade and Labor Standards in the European Union: A Gravity Model Approach

Using a gravity model, we examine whether labor standards are important determinants of bilateral export performance for EU-15 countries over the period 1988-2001. We assess the conventional wisdom that countries with low labor standards and less stringent regulations have performed better in terms of trade performance and use a panel data set in a triple-indexed gravity model to conduct our empirical investigation. Our empirical results indicate that labor standards matter, but that the conventional wisdom does not always hold. The standard variables used in gravity equations conform to theoretical expectations and are highly significant.