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Economic Integration, Wage Policies and Social Policies

Author

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  • Pflüger, Michael P.

    (University of Würzburg)

Abstract

This paper uses a two country trade and geography model of monopolistic competition to study the effects of wage policies and social policies on the location of industry. It is first shown that a union wage push in one of two otherwise identical countries induces a relocation of firms which increases with the level of economic integration as measured by trade costs. This 'traditional view' is then contrasted with a 'new economic geography view' in which one of the countries has historically emerged as the core. The agglomeration rent which accrues to the mobile factor gives unions and governments in the core scope to set higher wages and to choose more generous welfare policies than their counterparts in the periphery without having to encounter an exit of firms. The relationship between the maximum international union wage differential and the level of integration is shown to be bellshaped.

Suggested Citation

  • Pflüger, Michael P., 2003. "Economic Integration, Wage Policies and Social Policies," IZA Discussion Papers 748, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp748
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    References listed on IDEAS

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    1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    monopolistic competition; integration; wages; industry location; agglomeration;
    All these keywords.

    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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