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Industrial Policy in the Presence of Wage Distortions: The Case of the U.S. Auto and Steel Industries

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  • de Melo, Jaime
  • Tarr, David

Abstract

This paper examines the welfare effects of protection in two high wage premia sectors--autos and steel--to determine if protection is justified to correct for the labor misallocation due to the wage premia. If wage premia are exogenous, under most product market structures, labor misallocation is too small to justify protection. More importantly, due to union influence in autos and steel, the wage premium is endogenous. Then wage premia may even exacerbate the welfare costs of protection. With increasing returns to scale and firm entry, optimal policies may be reversed, so further caution must be exercised. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 34 (1993)
Issue (Month): 4 (November)
Pages: 833-51

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Handle: RePEc:ier:iecrev:v:34:y:1993:i:4:p:833-51

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Cited by:
  1. de Melo, J. & Tarr, D., 1994. "VERs Under Imperfect Competition and Foreing Direct Investment: A Case study of the US-Japan Auto VER," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 94.09, Institut d'Economie et Econométrie, Université de Genève.
  2. Phillip Swagel, 1993. "Union behavior, industry rents, and optimal policies," International Finance Discussion Papers 459, Board of Governors of the Federal Reserve System (U.S.).
  3. Jensen, Jesper & Tarr, David, 2002. "Trade, foreign exchange, and energy policies in the Islamic Republic of Iran : reform agenda, economic implications, and impact on the poor," Policy Research Working Paper Series 2768, The World Bank.
  4. Morkre, Morris & Tarr, David G., 1993. "Reforming Hungarian agricultural trade policy : a quantitative evaluation," Policy Research Working Paper Series 1185, The World Bank.
  5. Rutherford, Thomas F. & Tarr, David G., 2002. "Trade liberalization, product variety and growth in a small open economy: a quantitative assessment," Journal of International Economics, Elsevier, vol. 56(2), pages 247-272, March.
  6. Grether, Jean-Marie & de Melo, Jaime & Olarreaga, Marcelo, 2001. "Who determines Mexican trade policy?," Journal of Development Economics, Elsevier, vol. 64(2), pages 343-370, April.
  7. Rutherford, Thomas F. & Tarr, David G., 1998. "Trade liberalization and endogenous growth in a small open economy : a quantitative assessment," Policy Research Working Paper Series 1970, The World Bank.
  8. Madani, Dorsati & Olarreaga, Marcelo, 2002. "Politically optimal tariffs : an application to Egypt," Policy Research Working Paper Series 2882, The World Bank.
  9. de Melo, Jaime & Tarr, David, 1991. "VERs under imperfect competition and foreign direct investment : a case study of the U.S. - Japan auto VER," Policy Research Working Paper Series 667, The World Bank.

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