This paper considers the impact of economic integration on wages and employment in a second-best world where countries are identical in all respects. It is first shown that international trade increases the competitive pressures on firms and thus reduces price cost markups. As product market imperfections diminish, it is demonstrated that in the presence of unions, employment unambiguously rises whereas wages may either rise or fall. If firms are internationally mobile, the threat of firm mobility increases wage pressure, thereby reducing both wages and unemployment. Although net efficiency gains result, the distribution of these gains will be uneven
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