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Labor Market Regulation, International Trade and Footloose Capital

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  • Palokangas, Tapio K.

    (University of Helsinki)

Abstract

I examine the effects of globalization in countries where the employed workers support the unemployed and the governments control wages by regulating the workers' relative bargaining power. I use a general oligopolistic equilibrium model of two integrated countries with two inputs: labor and potentially footloose capital. National competition for jobs by labor market deregulation creates a distortion with suboptimal wages. The mobility of capital aggravates that distortion by increasing the wage elasticity of labor demand, which decreases wages and welfare even further. The delegation of labor market regulation to an international agent eliminates that distortion, increasing wages and aggregate welfare.

Suggested Citation

  • Palokangas, Tapio K., 2017. "Labor Market Regulation, International Trade and Footloose Capital," IZA Discussion Papers 10468, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp10468
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    international trade; footloose capital; labor market regulation; capital market liberalization;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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