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Endogenous labor market institutions in an open economy

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  • Felbermayr, Gabriel J.
  • Larch, Mario
  • Lechthaler, Wolfgang

Abstract

The paper sets up a two-country asymmetric trade model with heterogeneous firms, search frictions and endogenous labor market institutions. Countries are linked by trade in goods and non-cooperatively set unemployment benefits to maximize national welfare. We show that more open and smaller economies have more generous unemployment benefit replacement rates as a larger fraction of the costs is borne by foreign trading partners. These results are in line with empirical stylized facts. Additionally, we find that the optimal level of unemployment benefits is independent from the level of unemployment benefits abroad and that non-cooperatively set unemployment rates are inefficiently high.

Suggested Citation

  • Felbermayr, Gabriel J. & Larch, Mario & Lechthaler, Wolfgang, 2012. "Endogenous labor market institutions in an open economy," International Review of Economics & Finance, Elsevier, vol. 23(C), pages 30-45.
    • Handle: RePEc:eee:reveco:v:23:y:2012:i:c:p:30-45
    DOI: 10.1016/j.iref.2011.10.004
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    Cited by:

    1. Gabriel J. Felbermayr & Mario Larch & Wolfgang Lechthaler, 2013. "Unemployment in an Interdependent World," American Economic Journal: Economic Policy, American Economic Association, vol. 5(1), pages 262-301, February.
    2. Braun, Sebastian & Spielmann, Christian, 2012. "Wage subsidies and international trade: When does policy coordination pay?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-42.
    3. Povilas Lastauskas, 2013. "Europe’s Revolving Doors: Import Competition and Endogenous Firm Entry InstitutionS," Cambridge Working Papers in Economics 1360, Faculty of Economics, University of Cambridge.
    4. Stepanok, Ignat, 2018. "A North–South model of trade with search unemployment," European Economic Review, Elsevier, vol. 101(C), pages 546-566.
    5. Potrafke, Niklas, 2013. "Globalization and labor market institutions: International empirical evidence," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 829-842.
    6. Povilas Lastauskas & Julius Stakėnas, 2020. "Labour market institutions in open economy: Sectoral reallocations, aggregate adjustments, and spillovers," Review of International Economics, Wiley Blackwell, vol. 28(3), pages 814-845, August.
    7. Maarten DOSSCHE & Vivien LEWIS & Céline POILLY, 2014. "Employment, hours and optimal monetary policy," Working Papers of Department of Economics, Leuven ces14.16, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    8. Bhaumik, Sumon K. & Frensch, Richard & Huber, Stephan, 2021. "Political Economy of Labour Market Institutions in a Globalised Era," IZA Discussion Papers 14121, Institute of Labor Economics (IZA).
    9. Andersen, Torben M. & Sørensen, Allan, 2023. "The interdependencies between the private and public sectors in open economies," European Economic Review, Elsevier, vol. 160(C).
    10. Schmerer, Hans-Jörg, 2014. "Foreign direct investment and search unemployment: Theory and evidence," International Review of Economics & Finance, Elsevier, vol. 30(C), pages 41-56.
    11. Jianchun Fang & Giray Gozgor & James H. Nolt, 2022. "Globalisation, economic uncertainty and labour market regulations: Implications for the COVID‐19 crisis," The World Economy, Wiley Blackwell, vol. 45(7), pages 2165-2187, July.
    12. Peter Eppinger & Niklas Potrafke, 2016. "Did Globalisation Influence Credit Market Deregulation?," The World Economy, Wiley Blackwell, vol. 39(3), pages 426-443, March.
    13. Stefan Kipar, 2011. "The Effect of Restrictive Bank Lending on Innovation: Evidence from a Financial Crisis," ifo Working Paper Series 109, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    14. Davidson, Carl & Matusz, Steven J., 2012. "A model of globalization and firm-worker matching: How good is good enough?," International Review of Economics & Finance, Elsevier, vol. 23(C), pages 5-15.

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    More about this item

    Keywords

    Endogenous labor market institutions; Unemployment; International trade; Search frictions; Heterogeneous firms;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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