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Can Countries with Severe Labor Market Frictions Gain from Globalization?

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  • Wolf-Heimo Grieben

Abstract

The interaction between increased Southern trade integration (globalization) and labor market frictions is analyzed in a dynamic general-equilibrium North-South nonscale growth model with endogenous Northern innovation and endogenous Southern imitation. The qualitative employment, growth, and relative-wage effects of globalization are shown to depend crucially on the degree of Northern labor market frictions. I demonstrate that only Northern countries with particularly large labor market adjustment costs for both firms and workers benefit from globalization in terms of permanently lower unemployment, temporarily faster growth, and permanently higher wages. This is because of the resulting general-equilibrium feedback effects of Northern labor market frictions that deter Southern imitation incentives. The result does not imply the recommendation to increase Northern labor market rigidities, but it challenges the common belief that labor market flexibility helps Northern countries to better adjust to the "globalization threat" coming from the South. Copyright © 2009 The Author. Journal compilation © 2009 Blackwell Publishing Ltd.

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  • Wolf-Heimo Grieben, 2009. "Can Countries with Severe Labor Market Frictions Gain from Globalization?," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 230-247, May.
  • Handle: RePEc:bla:rdevec:v:13:y:2009:i:2:p:230-247
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    Cited by:

    1. Chihiro Inaba & Katsufumi Fukuda, 2015. "Effects on the Cross-Country Difference in the Minimum Wage on International Trade, Growth and Unemployment," Discussion Paper Series DP2015-29, Research Institute for Economics & Business Administration, Kobe University.
    2. Wolf-Heimo Grieben & Fuat Sener, 2009. "Labor Unions, Globalization, and Mercantilism," CESifo Working Paper Series 2889, CESifo Group Munich.
    3. Grieben, Wolf-Heimo & Sener, Fuat, 2009. "Globalization, rent protection institutions, and going alone in freeing trade," European Economic Review, Elsevier, vol. 53(8), pages 1042-1065, November.

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