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Does European Unemployment Prop up American Wages?

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  • Donald R. Davis

Abstract

We consider trade between a flexible wage America and a rigid real wage Europe. In a benchmark case, a move from autarky to free trade doubles the European unemployment rate, while it raises the American unskilled wage to the high European level. Entry of the unskilled South to world markets raises unemployment in Europe. But Europe's commitment to the high wage completely insulates America from the shock. Immigration to America raises American income, but lowers European income dollar-for-dollar, while European unemployment rises one-for-one. We consider a stylized game of the choice of factor market institutions. Mitterand's Europe chooses a high minimum wage and Reagan's America chooses a flexible wage for the unskilled. Paradoxically, unskilled workers are worse off in Europe. Trade equalizes wages, but Europeans bear all of the unemployment required to sustain the high wage.

Suggested Citation

  • Donald R. Davis, 1996. "Does European Unemployment Prop up American Wages?," NBER Working Papers 5620, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5620
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    Cited by:

    1. Ngo Van Long & Raymond Riezman & Antoine Soubeyran, 2007. "Trade, Wage Gaps, and Specific Human Capital Accumulation," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 75-92, February.
    2. Rod Tyers & William Coleman, 2005. "Beyond Brigden: Australia’s Pre-War Manufacturing Tariffs, Real Wages and Economic Size," ANU Working Papers in Economics and Econometrics 2005-456, Australian National University, College of Business and Economics, School of Economics.
    3. Donald R. Davis & Trevor A. Reeve, 1997. "Human Capital, Unemployment, and Relative Wages in a Global Economy," NBER Working Papers 6133, National Bureau of Economic Research, Inc.
    4. George J. Borjas & Richard B. Freeman & Lawrence F. Katz, 2021. "How Much Do Immigration and Trade Affect Labor Market Outcomes?," World Scientific Book Chapters, in: Foundational Essays in Immigration Economics, chapter 8, pages 163-234, World Scientific Publishing Co. Pte. Ltd..
    5. Sébastien Jean, 2000. "The Effect of International Trade on Labor‐Demand Elasticities: Intersectoral Matters," Review of International Economics, Wiley Blackwell, vol. 8(3), pages 504-516, August.
    6. Devashish Mitra & Priya Ranjan, 2007. "Offshoring and Unemployment," Working Papers 060719, University of California-Irvine, Department of Economics.
    7. Ben J Heijdra & Christian Keuschnigg & Wilhelm Kohler, 2014. "Eastern Enlargement of the EU: Jobs, Investment and Welfare in Present Member Countries," World Scientific Book Chapters, in: European Economic Integration, WTO Membership, Immigration and Offshoring, chapter 2, pages 37-83, World Scientific Publishing Co. Pte. Ltd..
    8. Robbins, Donald J., 2003. "The impact of trade liberalization upon inequality in developing countries : a review of theory and evidence," ILO Working Papers 993650553402676, International Labour Organization.
    9. Bernhard Heitger & Jürgen Stehn, 2003. "Trade, Technical Change, and Labour Market Adjustment," The World Economy, Wiley Blackwell, vol. 26(10), pages 1481-1502, November.
    10. Bas Jacobs, 2004. "The Lost Race between Schooling and Technology," De Economist, Springer, vol. 152(1), pages 47-78, March.
    11. Ajit Singh & Ann Zammit, 2019. "Globalisation, labour standards and economic development," Chapters, in: Jonathan Michie (ed.), The Handbook of Globalisation, Third Edition, chapter 12, pages 202-224, Edward Elgar Publishing.
    12. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
    13. Robert Stehrer, 2004. "Can Trade Explain the Sector Bias of Skill-biased Technical Change?," wiiw Working Papers 30, The Vienna Institute for International Economic Studies, wiiw.
    14. Guido G. Porto, 2008. "Agro-Manufactured Export Prices, Wages and Unemployment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(3), pages 748-764.
    15. Davis, Donald R., 1998. "Technology, unemployment, and relative wages in a global economy," European Economic Review, Elsevier, vol. 42(9), pages 1613-1633, November.
    16. Davidson, Carl & Martin, Lawrence & Matusz, Steven, 1999. "Trade and search generated unemployment," Journal of International Economics, Elsevier, vol. 48(2), pages 271-299, August.
    17. Wilhelm Kohler, 2002. "Issues of US-EU Trade Policy," Economics working papers 2002_03, Department of Economics, Johannes Kepler University Linz, Austria.
    18. repec:ilo:ilowps:365055 is not listed on IDEAS
    19. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
    20. Matthias Weiss, 2004. "Employment Effects of Skill Biased Technological Change when Benefits are Linked to Per-Capita Income," MEA discussion paper series 04043, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    21. Kurt Kratena, 2006. "International Outsourcing and Labour with Sector-specific Human Capital," WIFO Working Papers 272, WIFO.
    22. Gustavo Gonzaga & Beatriz Muriel & Cristina Terra, 2005. "Abertura Comercial, Desigualdade Salarial E Sindicalização," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] 073, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].

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    More about this item

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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