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Union behavior, industry rents, and optimal policies

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  • Swagel, Phillip

Abstract

This paper examines the welfare gains from strategic trade and industrial policy in the U.S. steel industry, focusing particularly on the potential gains from capturing labor rents. I take into account product market distortions such as price-setting firms, factor market distortions in the form of union-created labor rents, and the presence of fixed capital and underutilized capacity in U.S. steel production. ; The existence of underutilized capacity means that firms respond to protection by reducing the share of labor in production, eliminating the rents targeted by the policy and thus reducing the potential gains. At the same time, the union takes advantage of protection to "skim off" rents, further reducing the effectiveness of the optimal policy. Taking into account these endogenous responses substantially reduces the welfare gains from optimal policies. And simply reducing domestic labor market distortions results in a welfare gain nearly as large as that from optimal policies. This suggests that the focus on labor rents as the subject of U.S. trade and industrial policy is overstated, at least in manufacturing industries such as integrated steel.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 18 (2000)
Issue (Month): 6 (August)
Pages: 925-947

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Handle: RePEc:eee:indorg:v:18:y:2000:i:6:p:925-947

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Web page: http://www.elsevier.com/locate/inca/505551

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  1. Morrison, Catherine, 1988. "Subequilibrium in the North American Steel Industries: A Study of Short Run Biases from Regulation and Utilisation Fluctuations," Economic Journal, Royal Economic Society, vol. 98(391), pages 390-411, June.
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  14. Melvyn Fuss & Steven Murphy & Leonard Waverman, 1992. "The State of the North American and Japanese Motor Vehicle Industries: A Partially Calibrated Model to Examine the Impacts of Trade Policy Changes," NBER Working Papers 4225, National Bureau of Economic Research, Inc.
  15. Krishna, Kala, 1989. "Trade restrictions as facilitating practices," Journal of International Economics, Elsevier, vol. 26(3-4), pages 251-270, May.
  16. Rodrik, Dani, 1987. "Policy Targeting with Endogenous Distortions: Theory of Optimum Subsidy Revisited," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 903-11, November.
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