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International Welfare and Employment Linkages Arising from Minimum Wages

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  • Egger, Hartmut
  • Egger, Peter
  • Markusen, James R.

Abstract

We formulate a two-country model with monopolistic competition and heterogeneous firms to reconsider labor market linkages in open economies. Labor-market imperfections arise by virtue of country-specific real minimum wages. Two principal experiments are considered. First, we show that trade liberalization under minimum wages differs significantly from trade liberalization under standard assumptions. In the former case, there is effectively a perfectly elastic supply of labor to production whereas in the conventional case it is assumed that aggregate labor supply is perfectly inelastic. Standard effects on marginal and average firm productivity are reversed in our model, yet there are significant gains from trade arising from employment expansion, an effect quite different from the source of gains from trade in the conventional approach. Second, we show that with firm heterogeneity an increase in one country's minimum wage triggers firm exit in both countries and thus harms workers at home and abroad. In an extension to our baseline model, we illustrate that offshoring production from the high-wage to the low-wage country within multinational firms lowers the scope for exporting the costs of a higher minimum wage to the trading partner.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7387.

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Date of creation: Aug 2009
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Handle: RePEc:cpr:ceprdp:7387

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Keywords: Heterogeneous Firms; International Trade; Labour Market Linkages; Minimum Wages; Offshoring; Unemployment;

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References

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  1. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
  2. Kreickemeier, Udo & Nelson, Douglas, 2006. "Fair wages, unemployment and technological change in a global economy," Journal of International Economics, Elsevier, vol. 70(2), pages 451-469, December.
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  8. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
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Citations

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Cited by:
  1. Felbermayr, Gabriel J. & Larch, Mario & Lechthaler, Wolfgang, 2012. "Endogenous labor market institutions in an open economy," International Review of Economics & Finance, Elsevier, vol. 23(C), pages 30-45.
  2. Lommerud, Kjell Erik & Meland, Frode & Straume, Odd Rune, 2011. "North-South technology transfer in unionised multinationals," CEPR Discussion Papers 8664, C.E.P.R. Discussion Papers.
  3. Felbermayr, Gabriel & Janeba, Eckhard & Görg, Holger & Belke, Ansgar & Pflüger, Michael & Ebner, Stefan, 2010. "Schadet Deutschlands Exportpolitik den Nachbarn?," Munich Reprints in Economics 20581, University of Munich, Department of Economics.
  4. Hartmut Egger & Frode Meland, 2011. "Product and Labor Market Deregulation in Unionized Oligopoly with Asymmetric Countries," CESifo Working Paper Series 3611, CESifo Group Munich.
  5. Hartmut Egger & Daniel Etzel, 2010. "The Impact of Trade on Employment, Welfare, and Income Distribution in Unionized General Oligopolistic Equilibrium," Working Papers 088, Bavarian Graduate Program in Economics (BGPE).
  6. Benedikt Heid & Mario Larch, 2012. "International Trade and Unemployment: A Quantitative Framework," CESifo Working Paper Series 4013, CESifo Group Munich.
  7. Ma, Shuang & Sun, Churen & Tian, Guoqiang, 2011. "Minimum wage and export: evidence from Chinese firm-level data," MPRA Paper 35098, University Library of Munich, Germany.

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