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Information and Globalization: Wage Co-Movements, Labor Demand Elasticity, and Conventional Trade Liberalization

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  • James E. Rauch
  • Vitor Trindade

Abstract

We model home country familiarity with business opportunities in a foreign country as a parameter in a matching process between domestic and foreign firms. We show that as familiarity increases the effect of relative national labor supplies on relative national wages declines, the elasticity of domestic labor demand increases, and the extent of pass-through' of trade tax changes to home wages increases. Since the volume of trade is increasing in familiarity, trade liberalization has a greater impact on wages when the initial volume of trade is greater, all else equal. As familiarity becomes complete, the results of the 2 x 2 Heckscher-Ohlin-Samuelson model are obtained: relative national wages are fixed by trade taxes independent of relative national labor supplies, domestic labor demand is infinitely elastic, and pass-through of tax changes to wages is complete' in the sense that it is determined entirely by production technology and no arbitrage opportunities remain.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7671.

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Date of creation: Apr 2000
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Publication status: published as "Information, International Substitutability, and Globalization", American Economic Review, Vol. 93 (June 2003), pp. 775-791.
Handle: RePEc:nbr:nberwo:7671

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  1. Richard Portes & Helene Rey, 2000. "The determinants of cross-border equity flows," LSE Research Online Documents on Economics 20203, London School of Economics and Political Science, LSE Library.
  2. James E. Rauch & Alessandra Casella, 1998. "Overcoming Informational Barriers to International Resource Allocation: Prices and Group Ties," NBER Working Papers 6628, National Bureau of Economic Research, Inc.
  3. Engel, Charles & Rogers, John H, 2001. "Violating the Law of One Price: Should We Make a Federal Case Out of It?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 1-15, February.
  4. Egan, Mary Lou & Mody, Ashoka, 1992. "Buyer-seller links in export development," World Development, Elsevier, vol. 20(3), pages 321-334, March.
  5. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
  6. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
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Cited by:
  1. Nicita, Alessandro & Olarreaga, Marcelo, 2000. "Exports and information spillovers," Policy Research Working Paper Series 2474, The World Bank.
  2. James E. Rauch & Alessandra Casella, 2003. "Overcoming Informational Barriers to International Resource Allocation: Prices and Ties," Economic Journal, Royal Economic Society, vol. 113(484), pages 21-42, January.
  3. Feenstra Robert C & Hanson Gordon H. & Lin Songhua, 2004. "The Value of Information in International Trade: Gains to Outsourcing through Hong Kong," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-37, August.
  4. Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 135-159.
  5. Buch, Claudia M. & Lipponer, Alexander, 2010. "Volatile multinationals? Evidence from the labor demand of German firms," Labour Economics, Elsevier, vol. 17(2), pages 345-353, April.
  6. Caroline L. Freund & Diana Weinhold, 2000. "On the effect of the Internet on international trade," International Finance Discussion Papers 693, Board of Governors of the Federal Reserve System (U.S.).

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