Regulatory Chill on Minimum Wages: Effects of Veolia’s Arbitration Against Egypt

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Abstract

This study examines whether fear of international arbitration has weakened labor regulations in FDI recipient countries. It investigates whether a highly-publicized arbitration claim over minimum wage made third-party governments cautious about changing minimum wages in their own countries. The claim in question was initiated by the French firm Veolia against the Egyptian government in 2012, after the government mandated an increase in the minimum wage. I hypothesize that minimum wages stagna ted after Veolia filed its claim, particularly in countries with high inflows of FDI, due to governmental concerns that minimum wage policies could become targets of arbitration claims. Data was sourced from the International Labour Organization, which has been releasing information on statutory minimum wages across countries since 1980. I find that growth in minimum wage has declined significantly since 2012, but that this pattern is only observable in countries that have been respondents in at least one arbitration claim at ICSID. In countries that had never been involved in an ICSID arbitration claim, no such trend was observable. This suggests that while arbitration can cause regulatory chill in countries that are not directly involved in the claims, countries with previous experience as ICSID respondents are more vigilant about about avoiding future claims from foreign investors.

Author

• Youngchae Lee