Must improved labor standards hurt accumulation in the targeted sector? Stylized analysis of a developing economy

► I analyze the impact of labor standards on long-run accumulation, sectoral distribution, and structural change in a macroeconomic framework. ► To do so, I model a small open economy which has two tradable sectors, manufacturing and services. Foreign investment enters the former sector. ► Dynamic exercises show that, although higher standards in manufacturing hurt exports and foreign investment in the short run, the long-run effect on this sector is ambiguous. ► This is because, given learning-by-exporting, the real exchange rate changes that follow higher standards raise manufacturing profitability. ► The short-run impact and the possible lack of sufficient relative price movements, however, make higher standards risky for a low income economy.