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Does European Unemployment Prop up American Wages?

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Donald R. Davis

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Abstract

We consider trade between a flexible wage America and a rigid real wage Europe. In a benchmark case, a move from autarky to free trade doubles the European unemployment rate, while it raises the American unskilled wage to the high European level. Entry of the unskilled South to world markets raises unemployment in Europe. But Europe's commitment to the high wage completely insulates America from the shock. Immigration to America raises American income, but lowers European income dollar-for-dollar, while European unemployment rises one-for-one. We consider a stylized game of the choice of factor market institutions. Mitterand's Europe chooses a high minimum wage and Reagan's America chooses a flexible wage for the unskilled. Paradoxically, unskilled workers are worse off in Europe. Trade equalizes wages, but Europeans bear all of the unemployment required to sustain the high wage.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5620.

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Date of creation: Jun 1996
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Publication status: published as American Economic Review (June 1998).
Handle: RePEc:nbr:nberwo:5620

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Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

References listed on IDEAS
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  1. Paul Krugman, 1995. "Growing World Trade: Causes and Consequences," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-1), pages 327-377. [Downloadable!]
  2. Lawrence F. Katz & Gary W. Loveman & David G. Blanchflower, 1993. "A Comparison of Changes in the Structure of Wages," NBER Working Papers 4297, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May. [Downloadable!] (restricted)
  4. Edward E. Leamer, 1994. "Trade, Wages and Revolving Door Ideas," NBER Working Papers 4716, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Brecher, Richard A., 1974. "Optimal commercial policy for a minimum-wage economy," Journal of International Economics, Elsevier, vol. 4(2), pages 139-149, May. [Downloadable!] (restricted)
  6. Freeman, Richard B, 1995. "Are Your Wages Set in Beijing?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 15-32, Summer. [Downloadable!] (restricted)
  7. Brecher, Richard A, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 98-116, February. [Downloadable!] (restricted)
  8. Donald R. Davis & David E. Weinstein & Scott C. Bradford & Kazushige Shimpo, 1996. "The Heckscher-Ohlin-Vanek Model of Trade: Why Does It Fail? When Does It Work?," NBER Working Papers 5625, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. David Card, 1990. "The impact of the Mariel boatlift on the Miami labor market," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 43(2), pages 245-257, January.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Van Long, Ngo & Riezman, Raymond & Soubeyran, Antoine, 2003. "Trade, Wage Gaps, and Specific Human Capital Accumulation," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  2. Donald R. Davis & Trevor A. Reeve, 1997. "Human Capital, Unemployment and Relative Wages in a Global Economy," Harvard Institute of Economic Research Working Papers 1804, Harvard - Institute of Economic Research. [Downloadable!]
    Other versions:
  3. Matthias Weiss & Alfred Garloff, 2005. "Skill Biased Technological Change and Endogenous Benefits: The Dynamics of Unemployment and Wage Inequality," MEA discussion paper series 05100, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
    Other versions:
  4. Sebastien Jean, 2000. "The Effect of International Trade on Labour-Demand Elasticities: Intersectoral Matters," Working Papers 2000-07, CEPII research center. [Downloadable!]
    Other versions:
  5. Paul Oslington, 2000. "Factor Market Linkages in a Global Economy," Economics Series Working Papers 038, University of Oxford, Department of Economics. [Downloadable!]
    Other versions:
  6. Matthias Weiss, 2004. "Employment Effects of Skill Biased Technological Change when Benefits are Linked to Per-Capita Income," MEA discussion paper series 04043, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
    Other versions:
  7. Gustavo Gonzaga & Beatriz Muriel & Cristina Terra, 2005. "Abertura Comercial, Desigualdade Salarial E Sindicalização," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] 073, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  8. Bas Jacobs, . "The lost race between schooling and technology," CPB Discussion Papers 25, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  9. Wilhelm Kohler, 2002. "Issues of US-EU Trade Policy," Economics working papers 2002_03, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
  10. Donald R. Davis, 1996. "Technology, Unemployment, and Relative Wages in a Global Economy," NBER Working Papers 5636, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Ajit Singh & Ann Zammitt, 2003. "Globalisation, labour standards and economic development," ESRC Centre for Business Research - Working Papers wp257, ESRC Centre for Business Research. [Downloadable!]
  12. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics. [Downloadable!]
    Other versions:
  13. Ben J. Heijdra & Christian Keuschnigg & Wilhelm Kohler, 2001. "Eastern enlargement of the EU: Jobs, investment and welfare in present member countries," Economics working papers 2001-11, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
    Other versions:
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