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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 for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp10468
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    References listed on IDEAS

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    1. J. Peter Neary, 2016. "International Trade in General Oligopolistic Equilibrium," Review of International Economics, Wiley Blackwell, vol. 24(4), pages 669-698, September.
    2. Boulhol, Herv, 2009. "Do capital market and trade liberalization trigger labor market deregulation?," Journal of International Economics, Elsevier, vol. 77(2), pages 223-233, April.
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    4. Egger, Hartmut & Etzel, Daniel, 2012. "The impact of trade on employment, welfare, and income distribution in unionized general oligopolistic equilibrium," European Economic Review, Elsevier, vol. 56(6), pages 1119-1135.
    5. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 118(3), pages 879-907.
    6. Naylor, Robin, 1999. "Union Wage Strategies and International Trade," Economic Journal, Royal Economic Society, vol. 109(452), pages 102-125, January.
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    8. repec:wsi:wschap:9789813224919_0006 is not listed on IDEAS
    9. Egger, Hartmut & Etzel, Daniel, 2014. "Union wage-setting and international trade with footloose capital," Regional Science and Urban Economics, Elsevier, vol. 48(C), pages 56-67.
    10. Palokangas, Tapio K., 2015. "The Welfare Effects of Globalization with Labor Market Regulation," IZA Discussion Papers 9412, Institute for the Study of Labor (IZA).
    11. Udo Kreickemeier & Frode Meland, 2017. "Non-Traded Goods, Globalization, and Union Influence," World Scientific Book Chapters,in: International Trade and Labor Markets Welfare, Inequality and Unemployment, chapter 7, pages 173-201 World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    Keywords

    international trade; footloose capital; labor market regulation; capital market liberalization;

    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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