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Economic Integration, Wage Policies and Social Policies


  • Michael Pflüger


This paper sets up a two country monopolistic competition model with intra-industry trade to study the effects of an exogenous differential in wage and social policies on the location of industry. Two model scenarios are considered. In the traditional one with physical capital, such a differential induces a relocation effect which increases with the level of trade integration. The 'new economic geography' world assumes mobile entrepreneurs which can relocate thus bringing agglomeration forces into play. The most significant difference between this world and the traditional one is that, at high levels of trade integration, where one country has emerged as the core and the other as the periphery, the core may have more generous social policies and higher wages than the periphery without inducing a relocation of firms. The scope to have higher wage is constrained, however, and related to the level of trade integration in a bell-shaped way.

Suggested Citation

  • Michael Pflüger, 2003. "Economic Integration, Wage Policies and Social Policies," Discussion Papers of DIW Berlin 354, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp354

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    References listed on IDEAS

    1. Herschel I. Grossman, 2001. "The Creation of Effective Property Rights," American Economic Review, American Economic Association, vol. 91(2), pages 347-352, May.
    2. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, April.
    3. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-623, June.
    4. repec:cup:apsrev:v:83:y:1989:i:02:p:465-480_08 is not listed on IDEAS
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    More about this item


    Integration; wages; industry location; agglomeration; monopolistic competition;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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