This study examines the labor cost incentive for capital movement in manufacturing within the European Union, a key aspect of the “social dumping” debate in Western Europe. The authors find that the percentage differences in unit labor costs between the more developed and less developed countries in the Union not only were large in 1980 but actually grew between 1980 and 1986, and separate estimates of compensation and productivity growth rates do not indicate that significant convergence occurred over the remainder of the 1980s. Although these findings apparently confirm that a labor cost incentive for capital mobility does exist, analysis of foreign direct investment data indicates that during the period 1980–88 capital flows to the lower labor cost countries actually were not much larger than capital flows to the higher labor cost countries.
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