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Trade and Race-to-the-bottom Wage Competition

  • Damiaan Persyn

This paper looks at how increasing economic integration affects wage bargaining between unions and firms if firms are internationally mobile. Using a simple NEG model we find that if firms are perfectly mobile, countries are sufficiently symmetric and wages are bargained over at the firm level they are set on the competitive level. For a more centralised bargaining scheme wage demands are made even if firms can perfectly threat to relocate. If countries are asymmetric full agglomeration becomes possible and rent-sharing between unions and firms then occurs as unions are able to appropriate part of the agglomeration rents in form of higher wages. As agglomeration rents are a hump-shaped function of trade freeness in the larger country this implies the same non-monotonic relationship between wages and the level of trade freeness. We then investigate the case where wage bargaining takes place sequentially in each country. The comparative statics of the international Nash-equilibrium in wages show increased international economic integration only leads to tighter international wage competition if countries are sufficiently symmetric. For the asymmetric case the comparative advantage and relative size of the country determine whether and how economic integration leads to lower wages.

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Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 17306.

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Length: 39 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:lic:licosd:17306
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  1. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," International Trade 9801001, EconWPA.
  2. Lu�s M B Cabral & Jos� Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
  3. Baldwin, Richard & Krugman, Paul, 2000. "Agglomeration, Integration and Tax Harmonization," CEPR Discussion Papers 2630, C.E.P.R. Discussion Papers.
  4. Mezzetti, C. & Dinopoulos, E., 1989. "Domestic Unionization And Import Competition," Papers 337, California Davis - Institute of Governmental Affairs.
  5. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  6. Baldwin, Richard & Okubo, Toshihiro, 2004. "Heterogeneous Firms, Agglomeration and Economic Geography: Selection and Sorting," CEPR Discussion Papers 4602, C.E.P.R. Discussion Papers.
  7. Naylor, Robin, 1999. "Union Wage Strategies and International Trade," Economic Journal, Royal Economic Society, vol. 109(452), pages 102-25, January.
  8. Brander, James A. & Spencer, Barbara J., 1988. "Unionized oligopoly and international trade policy," Journal of International Economics, Elsevier, vol. 24(3-4), pages 217-234, May.
  9. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  10. Picard, P. M. & Toulemonde, E., 2003. "Regional asymmetries: economies of agglomeration versus unionized labor markets," Regional Science and Urban Economics, Elsevier, vol. 33(2), pages 223-249, March.
  11. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-87, December.
  12. Jakob Roland Munch, 2003. "The Location of Firms in Unionized Countries," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(1), pages 49-72, 03.
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