Labor Market Regulation, International Trade and Footloose Capital. IZA SP No. 10468

I examine the effects of globalization in countries where the employed workers support the unemployed and the governments control wages by regulating the workers’ relative bargaining power. I use a general oligopolistic equilibrium model of two integrated countries with two inputs: labor and potentially footloose capital. National competition for jobs by labor market deregulation creates a distortion with suboptimal wages. The mobility of capital aggravates that distortion by increasing the wage elasticity of labor demand, which decreases wages and welfare even further. The delegation of labor market regulation to an international agent eliminates that distortion, increasing wages and aggregate welfare

The welfare effects of globalization with labor market regulation

The author examines how globalization affects wages and welfare in a general equilibrium model of international trade with partly oligopolistic markets. Globalization is modeled as reducing trade costs or opening up shielded sectors to trade. There is a national or international common agency that determines minimum wages for the oligopolists, either directly or through supporting labor unions. The lobbies of employers and labor unions influence that agency, relating their prospective political contributions to the latter's decisions. Both a shift from national to international regulation and a decrease in trade costs promote aggregate welfare, but decrease open-sector relative wages

Optimal Capital Taxation with Labor Unions

In this paper, I examine the nature of optimal capital taxation in an economy where labor unions set wages. Wage contracts are called binding, if they protect investors against immediate expropriation after new machines are installed. I show that in order to maintain aggregate production efficiency the government needs a labor tax only in the presence and taxes on both labor and capital in the absence of binding contracts. In addition, I construct optimal tax rules for the cases of both binding and non-binding wage contracts

Economic Integration, Lobbying by Firms and Workers, and Technological Change

I examine a common market with the following institutions. Oligopolistic /rms improve their productivity by R&D. Wages are determined by union-employer bargaining. Firms and workers lobby the authority that accepts new members and regulates unions' and /rms' market power. The main /ndings are as follows. Small common markets have incentives to expand, but large ones are indi.erent to new members. With product market deregulation, there is an upper limit for the size of the common market and the growth rate diminishes with integration

Regulation versus subsidies in conservation with a self-interested policy maker

This article examines the following case. A set of countries produce goods from labor, government input and natural resources. Because the conservation of natural resources in any country yields utility (e.g., through biodiversity) in every country, and because there is no benevolent international government, a resident of the countries is chosen as the regulator to whom conservation policy is delegated. The countries influence the regulator by their political contributions. In this common agency setup, the following result is proven: as long as the minimum conservation standards are implemented, conservation subsidies are welfare decreasing, involving excessive conservation. This suggests that there should be no "co-financing" for designated conservation sites in the EU NATURA 2000 project

Competition and Product Cycles with Non-Diversifiable Risk

This paper analyzes the growth effects of competition in a product-cycle model where R&D firms both innovate and imitate and households are subject to non-diversifiable risk. I prove that product market competition promotes growth when the initial level of competition is high enough. In contrast to the earlier product-cycle models with diversifiable risk, I show also the following. Some positive profits are necessary for technological change. The larger the proportion of industries subject to price competition, the slower economic growth

Fertility, Mortality and Environmental Policy. IZA DP No. 10465

This article examines pollution and environmental mortality in an economy where fertility is endogenous and output is produced from labor and capital by two sectors, dirty and clean. An emission tax curbs dirty production, which decreases pollution-induced mortality but also shifts resources to the clean sector. If the dirty sector is more capital intensive, then this shift increases labor demand and wages. This, in turn, raises the opportunity cost of rearing a child, thereby decreasing fertility and the population size. Correspondingly, if the clean sector is more capital intensive, then the emission tax decreases the wage and increases fertility. Although the proportion of the dirty sector in production falls, the expansion of population boosts total pollution, aggravating mortality

Optimal taxation with endogenous fertility and health-damaging emissions

Output is produced from labor and capital by technologies that differ in their emission intensity and relative capital intensity. Aggregate emissions decrease every individual’s health, but each individual can invest its own health. Population grows by the difference of fertility and exogenous mortality. Labor is used in production or child rearing. I construct a differential game where the benevolent government is a leader that determines taxes and subsidies, while the representative family is a follower that saves in capital and decides on its number of children. The main results are as follows. Without government intervention, population increases or decreases indefinitely. Capital should be taxed, if dirty technology, and subsidized, if clean technology is relatively capital intensive. Child rearing should be taxed, if dirty technology is relatively capital intensive or mildly labor intensive

Optimal Policy with R&D-based Growth and the Risk of Environmental Disaster

The extraction of carbon energy contributes to the global stock of pollution, increasing the risk of welfare-damaging environmental disaster. The governments of the countries educate workers as scientists. Oligopolists produce goods by workers and carbon energy. R&D Firms improve effciency by scientists to supplant incumbent oligopolists through competition, which generates economic growth. In this setup, an international central planner can decentralize the social optimum by setting a precautionary tax on emissions before the occurrence of the disaster. That tax hampers pollution, but speeds up economic growth. The socially optimal level of the tax is derived