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Trade and the (Dis)Incentive to Reform Labor Markets: The Case of Reform in the European Union

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  • George Alessandria
  • Alain Delacroix

Abstract

In a closed economy general equilibrium model, Hopenhayn and Rogerson (1993) find large welfare gains to removing firing restrictions. We explore the extent to which international trade alters this result. When economies trade, labor market policies in one country spill over to other countries through their effect on the terms of trade. A key finding in the open economy is that the share of the welfare gains from domestic labor market reform exported substantially exceeds the share of goods exported. In our baseline case, 105 percent of the welfare gains are exported even though the domestic economy only exports 30 percent of its goods. Thus, with international trade a country receives little to no benefit, and possibly even loses, from unilaterally reforming its labor market. A coordinated elimination of firing taxes yields considerable benefits. We find the welfare gains to the U.K. from labor market reform by its continental trading partners of 0.21 percent of steady state consumption. This insight provides some explanation for recent efforts toward labor market reform in the European Union.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0738.

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Date of creation: 2007
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Handle: RePEc:lvl:lacicr:0738

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Keywords: Firing Costs; International Trade; Labor Market Reform;

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Citations

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Cited by:
  1. Dao, Mai Chi, 2013. "Foreign labor costs and domestic employment: What are the spillovers?," Journal of International Economics, Elsevier, vol. 89(1), pages 154-171.
  2. Busl, Claudia & Seymen, Atılım, 2013. "The German labour market reforms in a European context: A DSGE analysis," ZEW Discussion Papers 13-097, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Wolf-Heimo Grieben & Fuat Sener, 2009. "Labor Unions, Globalization, and Mercantilism," CESifo Working Paper Series 2889, CESifo Group Munich.
  4. Oleg Itskhoki & Elhanan Helpman, 2008. "Labor Market Rigidities, Trade and Unemployment," 2008 Meeting Papers 690, Society for Economic Dynamics.
  5. George Alessandria - Alain Delacroix, 2004. "Trade and the (Dis)Incentive to Reform Labor Markets: The Case of Reform in the European Union," Econometric Society 2004 North American Summer Meetings 233, Econometric Society.
  6. Claudia Busl & Atilim Seymen, 2013. "(Spillover) Effects of Labour Market Reforms in Germany and France," WWWforEurope Working Papers series 8, WWWforEurope.
  7. Alain Delacroix & Etienne Wasmer, 2009. "Layoff Costs and Efficiency with Asymmetric Information," Sciences Po publications info:hdl:2441/5l6uh8ogmqi, Sciences Po.
  8. Alain Delacroix & Etienne Wasmer, 2007. "Job and Workers Flows in Europe and the US: Specific Skills or Employment Protection?. Midwest Macroeconomics Meetings 2007, April 27-29, 2007, Cleveland, Ohio," Sciences Po publications info:hdl:2441/9938, Sciences Po.

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