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Trade and the (Dis)Incentive to Reform Labor Markets: The Case of Reform in the European Union

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Listed author(s):
  • George Alessandria - Alain Delacroix

Abstract

In a closed economy general equilibrium model, Hopenhayn and Rogerson (1993) find large welfare gains to removing firing restrictions. We explore the extent to which international trade alters this result. When economies trade, labor market policies in one country spill over to other countries through a change in the terms of trade. This reduces the incentive to reform labor markets. In a policy game over firing taxes between countries, we find that countries optimally choose positive levels of firing taxes. A coordinated elimination of firing taxes yields considerable benefits. This insight provides some explanation for recent efforts toward labor market reform in the European Union

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 233.

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Date of creation: 11 Aug 2004
Handle: RePEc:ecm:nasm04:233
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Keywords: Trade; Labor Market Reform;

Other versions of this item:

Find related papers by JEL classification:
  • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
  • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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