Industrial Policy in the Presence of Wage Distorsions: The Case of the US Auto and Steel Industries
This paper examines the welfare effects of protection in two high wage premia sectors—autos and steel—to determine if protection is justified to correct for the labor misallocation due to the wage premia. If wage premia are exogenous, under most product market structures, labor misallocation is too small to justify protection. More importantly, due to union influence in autos and steel, the wage premium is endogenous. Then wage premia may even exacerbate the welfare costs of protection. With increasing returns to scale and firm entry optimal policies may be reversed, so further caution must be exercised.
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