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Labor Market Rigidities and the Political Economy of Trade Protection

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  • Matschke, Xenia

Abstract

Labor market rigidities are commonly believed to be a major reason for imposing trade impediments. In this paper, I introduce labor market rigidities (such as influential trade unions and high unemployment benefits), that are prevalent in continental European countries, into the well-known Grossman and Helpman (1994) protection for sale model, which has emerged as the leading model in the political economy of trade protection literature. I show that contrary to commonly held views, these labor market rigidities do not necessarily increase equilibrium trade protection. A testable equilibrium trade protection equation is also derived. The findings in this paper are hence particularly relevant for empirical tests of trade policy determinants in economies with more regulated labor markets.

Suggested Citation

  • Matschke, Xenia, 2004. "Labor Market Rigidities and the Political Economy of Trade Protection," Santa Cruz Department of Economics, Working Paper Series qt9gd146fx, Department of Economics, UC Santa Cruz.
    • Handle: RePEc:cdl:ucscec:qt9gd146fx
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    References listed on IDEAS

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    1. Kishore Gawande & Usree Bandyopadhyay, 2000. "Is Protection for Sale? Evidence on the Grossman-Helpman Theory of Endogenous Protection," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 139-152, February.
    2. Xenia Matschke & Shane M. Sherlund, 2006. "Do Labor Issues Matter in the Determination of U.S. Trade Policy? An Empirical Reevaluation," American Economic Review, American Economic Association, vol. 96(1), pages 405-421, March.
    3. Baldwin, Robert E & Magee, Christopher S, 2000. "Is Trade Policy for Sale? Congressional Voting on Recent Trade Bills," Public Choice, Springer, vol. 105(1-2), pages 79-101, October.
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    6. Giovanni Maggi & Pinelopi Koujianou Goldberg, 1999. "Protection for Sale: An Empirical Investigation," American Economic Review, American Economic Association, vol. 89(5), pages 1135-1155, December.
    7. Kiminori Matsuyama, 1990. "Export Subsidies as an Outcome of the Management-Labor Conspiracy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 803-813.
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    Cited by:

    1. Uysal, Pinar & Yotov, Yoto V. & Zylkin, Thomas, 2015. "Firm heterogeneity and trade-induced layoffs: An empirical investigation," European Economic Review, Elsevier, vol. 75(C), pages 80-97.
    2. Xenia Matschke & Shane M. Sherlund, 2006. "Do Labor Issues Matter in the Determination of U.S. Trade Policy? An Empirical Reevaluation," American Economic Review, American Economic Association, vol. 96(1), pages 405-421, March.
    3. Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2005. "Trade, wages, and the political economy of trade protection: evidence from the Colombian trade reforms," Journal of International Economics, Elsevier, vol. 66(1), pages 75-105, May.
    4. Matschke, Xenia, 2008. "Costly revenue-raising and the case for favoring import-competing industries," Journal of International Economics, Elsevier, vol. 74(1), pages 143-157, January.

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