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Do Labor Market Imperfections Increase Trade Protection? A Theoretical Investigation

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  • Xenia Matschke

    (University of Connecticut)

Abstract

Labor market imperfections are commonly believed to be a major reason for imposing trade impediments. In this paper, I introduce labor market rigidities that are prevalent in continental European countries into the well-known protection for sale model proposed by Grossman and Helpman (1994). I show that contrary to commonly held views, imperfections in the labor market do not necessarily increase equilibrium trade protection. A testable equilibrium trade protection equation is also derived. The findings in this paper are hence particularly relevant for empirical tests of trade policy determinants in economies with more regulated labor markets.

Suggested Citation

  • Xenia Matschke, 2006. "Do Labor Market Imperfections Increase Trade Protection? A Theoretical Investigation," Working papers 2006-12, University of Connecticut, Department of Economics, revised Apr 2007.
  • Handle: RePEc:uct:uconnp:2006-12
    Note: I thank Scott Taylor for extensive discussions regarding this paper. His valuable comments and advice led to substantial improvements. Bob Baldwin, Bob Staiger, Achim Wambach and seminar participants at various universities provided helpful suggestions as well. Financial support from a Deutsche Forschungsgemeinschaft research fellowship is gratefully acknowledged.
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    References listed on IDEAS

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    1. Kishore Gawande & Usree Bandyopadhyay, 2000. "Is Protection for Sale? Evidence on the Grossman-Helpman Theory of Endogenous Protection," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 139-152, February.
    2. Xenia Matschke & Shane M. Sherlund, 2006. "Do Labor Issues Matter in the Determination of U.S. Trade Policy? An Empirical Reevaluation," American Economic Review, American Economic Association, vol. 96(1), pages 405-421, March.
    3. Baldwin, Robert E & Magee, Christopher S, 2000. "Is Trade Policy for Sale? Congressional Voting on Recent Trade Bills," Public Choice, Springer, vol. 105(1-2), pages 79-101, October.
    4. repec:wsi:wschap:9789814569156_0009 is not listed on IDEAS
    5. Lawrence F. Katz & Lawrence H. Summers, 1989. "Can Interindustry Wage Differentials Justify Strategic Trade Policy?," NBER Chapters,in: Trade Policies for International Competitiveness, pages 85-124 National Bureau of Economic Research, Inc.
    6. Theo Eicher & Thomas Osang, 2002. "Protection for Sale: An Empirical Investigation: Comment," American Economic Review, American Economic Association, vol. 92(5), pages 1702-1710, December.
    7. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    8. Phillip McCalman, 2004. "Protection for Sale and Trade Liberalization: an Empirical Investigation," Review of International Economics, Wiley Blackwell, vol. 12(1), pages 81-94, February.
    9. Giovanni Maggi & Pinelopi Koujianou Goldberg, 1999. "Protection for Sale: An Empirical Investigation," American Economic Review, American Economic Association, vol. 89(5), pages 1135-1155, December.
    10. John K. Hill, 1984. "Union Wage Distortions and the Size and Efficiency of the Optimal Tariff," Canadian Journal of Economics, Canadian Economics Association, vol. 17(1), pages 146-155, February.
    11. Rama, Martin & Tabellim, Guido, 1998. "Lobbying by capital and labor over trade and labor market policies," European Economic Review, Elsevier, vol. 42(7), pages 1295-1316, July.
    12. Rodrik, Dani, 1995. "Political economy of trade policy," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 28, pages 1457-1494 Elsevier.
    13. Kiminori Matsuyama, 1990. "Export Subsidies as an Outcome of the Management-Labor Conspiracy," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 803-813.
    14. Devashish Mitra & Dimitrios D. Thomakos & Mehmet A. Ulubaşoğlu, 2016. "“Protection For Sale” In A Developing Country: Democracy Vs. Dictatorship," World Scientific Book Chapters,in: The Political Economy of Trade Policy Theory, Evidence and Applications, chapter 9, pages 163-174 World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Yoto V. Yotov, 2010. "Trade-Induced Unemployment: How Much Do We Care?," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 972-989, November.
    2. Lainez, Christopher & Matschke, Xenia & Yotov, Yoto, 2016. "Policy and Politics: Trade Adjustment Assistance in the Crossfire," School of Economics Working Paper Series 2016-5, LeBow College of Business, Drexel University.
    3. Marco Pinto & Jochen Michaelis, 2016. "The labor market effects of trade unions in an open economy: Layard meets Melitz," International Economics and Economic Policy, Springer, vol. 13(2), pages 223-232, April.
    4. Yoto V. Yotov, 2013. "Trade Adjustment, Political Pressure, And Trade Protection Patterns," Economic Inquiry, Western Economic Association International, vol. 51(3), pages 1867-1885, July.
    5. Jochen Michaelis & Marco de Pinto, 2014. "The labor market effects of trade unions - Layard meets Melitz," IAAEU Discussion Papers 201406, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    6. Barbosa, Natália & Faria, Ana Paula, 2011. "Innovation across Europe: How important are institutional differences?," Research Policy, Elsevier, vol. 40(9), pages 1157-1169.
    7. repec:kap:jincot:v:17:y:2017:i:4:d:10.1007_s10842-017-0244-5 is not listed on IDEAS

    More about this item

    Keywords

    Tariffs; trade protection; protection for sale; labor market.;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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